Babalj, 20, joined Red Star in June last year, but has now returned to the A-League and signed a deal with Heart for the remainder of this season and the 2013-2014 campaign. He will face Wanderers on Saturday should his international clearance be processed.
"It's great to have Eli back; his contribution last season was outstanding and his hunger to do well and succeed is second to none," Heart head coach John Aloisi said.
"He might be available for this Saturday's match against the Wanderers, but if not, he will still give us a huge boost for the rest of the season."
Heart CEO Scott Munn said: "The club thanks Red Star for its cooperation in this matter.
"While it is unfortunate that Eli's foray into professional football in Serbia did not work out, we look forward to seeing him back in the red and white of Melbourne Heart again."