Townsend, who also played for Tottenham Hotspur and Crystal Palace, joins Luton after two seasons at Everton.
He missed the end of the 2021/22 campaign and the entirety of the 2022/23 season with an anterior cruciate ligament injury.
"Andros has undoubted Premier League quality, which he has shown in this league and on the international stage," coach Rob Edwards told the club website.
"Of course, he has had a difficult period with injury through no fault of his own - and we wouldn't be able to sign him if he'd had played in the last 18 months.
"However, we're in a position to help each other: he can come in and give everything, bring out those technical qualities to help us and we can give him a platform to show everyone what he's all about."
Townsend won 13 England caps between 2013-2016, scoring three goals.
