In addition, 23-year-old defender George Baldock has signed a new two-year contract at Stadium MK.
Williams started his career with the Dons, before signing for Fulham for an undisclosed fee in June 2012.
The 20-year-old, who was in Wales' Euro 2016 squad, returned to the club on a one-month loan in February 2015, making four league appearances.
Williams has won seven Wales caps, having made his debut against Holland in 2014, but did not feature at the European Championships in France.
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League One side MK Dons have re-signed Fulham and Wales forward George Williams on a season-long loan deal.