"Billy's come to do a specific job for us," manager Chris Coleman told the clubs official website.
"We let a lot of our young lads go out on loan last season, as a result our reserve team suffered and a lot of the younger boys' heads dropped.
"He's under no illusions. He knows that his appearances for the first team will be few and far between. But we're looking at him to be with the reserves and help bring the young lads through. He's played at the top level and has a great way about him.
"Of course, if we need to call upon him, we know he won't let us down.
"After this season he will be working on the coaching side so it's a good signing for us."
Meanwhile, young centre-back Hudson has joined Ian Dowie's side having played on loan for the Palace boss during his time at Oldham.
Hudson has moved to Selhurst Park for an undisclosed fee.
"The club would like to thank Mark for his services," a statement on the official club website reads.