Powell joined the Hammers last season on a short-term deal and it was always predicted he would be offered a new deal after playing a key roll in winning promotion back to the Premiership.
He told the official Charlton website, “I'm delighted the opportunity arose for me to return to Charlton but it's a very weird one to be truthful.
“I was trying to negotiate a deal but was actually offered less than the previous year and I didn't feel that was right after the season I had.
“I feel I played a significant part in helping West Ham win promotion but things didn't work out and I became a free agent.
“It feels very strange pulling the Charlton training kit on again. A lot of people thought I was just on loan at West Ham but I was a West Ham player and looking forward to building on what we achieved last season.
“I know I couldn't have left on a better note but I didn't think that the play-off final would be my last for West Ham.”