Former European champions Forest are in the First Division relegation zone and Barmby will go straight into the squad for Saturday's home match against fellow strugglers Bradford City.
"I'm delighted to have a player of Nicky's quality on board with us," said Forest manager Joe Kinnear to the club's official website.
"He has got a great pedigree and he's enthusiastic to play for Nottingham Forest. He has played for some great clubs and his record of international appearances speaks for itself, as does the fact that he has been involved in transfer deals totalling almost £20m."
Barmby won 23 England caps, the last against Greece in 2001.