The 26-year-old spent six months at the Meadow on-loan from Premier League side Everton last season, making 20 appearances in blue and amber - scoring twice.
The defender spent 15 years with The Toffees, but saw his time at Goodison Park come to an end this summer.
Shrewsbury Town boss Steve Cotterill was quick to act to bring the defender back to Shropshire, with Pennington signing a two-year deal as he joins ahead of the 2021/22 campaign.
The boss was delighted to welcome the 'quality professional' back to the Meadow, confirming that the club had fought off other offers for Pennington's signature.
"Matthew Pennington is a quality boy and a quality professional." Cotterill said.
"Towards the end of last season, he was arguably our most consistent defender. Matthew scoring a couple of goals towards the end was an added bonus."
"He phoned me yesterday after he'd signed and he was really, really excited. We are looking forward to welcoming Matthew into the squad as a permanent signing. Matthew did have other offers but he wanted to sign for Shrewsbury Town.
"We are delighted to have him in the club and he's a great young man. Yesterday I told him that we need to improve him; he's all for that and he's a great lad.
"Matthew is a very clever young man and he will want to hit the ground running. I am sure that the period he's already had here will help him. There will be some new faces by the time he comes back but that will be good for everybody."