Santa Cruz, who played for Rovers between 2007-09 after leaving German giants Bayern Munich, could feature in their Premier League game at Chelsea on Saturday.
The striker scored 29 goals in 70 games during his first spell Ewood Park before former Rovers boss Mark Hughes took him to Manchester City in a £17.5 million deal.
Santa Cruz made just six Premier League starts for the Eastlands outfit as injuries and competition for places limited his opportunities. The 29-year-old is Rovers first signing since their takeover by Indian firm Venky's in November.
Rovers manager Steve Kean said: "When he was here first time he had a fantastic time and showed his quality.
"I think he feels he has got a little bit of business to finish. Hopefully he will go and do that until the end of the season.
"He has got an infectious personality and was very popular here first time around. I'm sure he will be this time.
"He's coming back to a place that was special to him and I am sure he is going to deliver as good if not better.''
City have hardened their stance on the issue of wages for loan players since agreeing to subsidise Craig Bellamy's move to Cardiff earlier this season and Blackburn will pay the majority of Santa Cruz's salary.
Kean believes that shows how serious Venky's are to bring top players to the club. The company, who are yet to win over the fans, were ridiculed earlier this month for making over-ambitious attempts to sign Brazil star Ronaldinho.
He said: "That is something that shows the fans we can now go and compete and we can see off other teams, not only in this country but abroad.
"It shows the ambitions of the owners to match these fees and salaries to bring quality to the club.''
The agreement with City contains no provision for a potential permanent deal but Kean plans to continue negotiating in the hope of securing Santa Cruz's services long term.
He said: "We are trying to speak to Manchester City to see if there can be an option at the end of it. We'll ask for that and if we can get it, all the better.''
Santa Cruz has made just two appearances this season at City, where he has been behind Carlos Tevez, Mario Balotelli and Emmanuel Adebayor in the pecking order. His move has been hastened by City's signing of Edin Dzeko this month.
The player said he had found it difficult to cope with the lack of first-team opportunities at Eastlands.
He said: "I felt a bit ignored by the manager of course. It's been hard not to play, not to be chosen, even though I feel great.
"It's frustrating, I've been playing a lot through the years with small injuries and just when I feel perfect to play and perform I wasn't selected.
"Through the media I kind of expected Blackburn to know I would decide to leave City and go somewhere I can play and be more appreciated, so when they showed their interest for me it was very easy to decide."
On the prospect of a permanent return to Ewood Park, he told BBC Radio Lancashire: "Maybe we can do something permanently. Blackburn's always been home to me they've treated me very well."
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