The news means James Wright has been released and will now focus on his Championship racing with Newcastle.
Boss Simon Stead has spent the past week looking at his options and made contact with Nielsen and wrapped thing up quickly.
He said: “Stefan is a trapper and if he can make the start he can add some quality at reserve for us.
“It’s a shame for James because I admire him immensely for coming back to the sport but I just feel he’s come up slightly short at reserve for us and we need to do something.
“James will always be welcome back at Sheffield and I would like to wish him well for the rest of the season with Newcastle, I really hope he can score plenty of points for them and then reset for next season.
“Stefan is extremely keen and wants to prove what he can do. It’s a good opportunity for him and I’m looking forward to seeing how he performs in our two important away meetings this week, starting at King’s Lynn on Monday.”
Meanwhile club co-promoter Damien Bates has also confirmed Danyon Hume has been handed the rising star slot at reserve for the two away meetings in place of the injured Josh Bates.
He said: “We are keeping a close eye on Josh and his fitness and we realise we need some continuity down at reserve.
“We’ll see how Danyon progresses and if he does well there may yet be more opportunities for him in Sheffield colours.”
Following Monday’s trip to Lynn, Sheffield head to Ipswich on Thursday before finally returning home to Owlerton for the visit of title hopefuls Wolverhampton on August 12 when a bumper crowd is expected.
KING’S LYNN: Richard Lawson, Cameron Heeps, Erik Riss, Lewis Kerr, Thomas Jorgensen, Connor Mountain, Ricky Wells.
SHEFFIELD: Jack Holder, Josh Pickering, Troy Batchelor, Kyle Howarth, Adam Ellis, Stefan Nielsen, Danyon Hume.