Blackstock, 23, ended last season on loan at the City Ground and becomes the club's second signing in as many days following the capture of Mark Lynch.
"I enjoyed everything about my time with Forest last season, I've had a taste of what this club is about and now I want more" he told the club's official website.
"We were in the relegation zone and ended up surviving quite comfortably and didn't lose in my time at the club."
Alex McLeish, the manager of Premier League side Birmingham City, has denied an interest in Reading's Stephen Hunt.
The Republic of Ireland international winger is rated at £4million by the Royals.
The Barnsley manager Simon Davey has played down speculation linking the Tykes with a move for the Ipswich Town midfielder Alan Quinn.
Davey confirmed contact with the players agent, but told the Sheffield Star he had decided against making an approach.
Barnsley's forward Iain Hume made his first appearance since suffering a fractured skull in November when he played for the Tykes against Gainsborough Trinity on Tuesday night.
The Watford midfielder Al Bangura has left the club by mutual consent.