The Aston Villa boss believes the winger’s pace and goalscoring prowess can help his side’s push for a Championship play-off spot.
Green spent the first half of the season on loan at Fratton Park.
He scored five goals in 12 appearances, but completed just two starts in the League One title push.
The England under-20 international returned to the midlands last week and came on as a substitute in Villa’s 2-2 draw with Hull on Saturday.
Because Green has already represented two teams this campaign, it means he cannot be loaned to another club.
Smith has ruled out the 20-year-old moving back to Fratton Park, though.
With Villa sitting in 13th spot and seven points behind the top six, the manager feels Green’s qualities have bolstered his side’s attacking options.
Smith told the Birmingham Mail: ‘He came on and did OK. We know he has pace.
‘He is a local lad and probably in the final third his delivery has to get a bit better, though he is not the only one.
‘I think if we can work on him and keep developing he will become a very good player for Villa.
‘He has done very well at Portsmouth, though probably not had as much game time as he would have liked.
‘He has been used more as an impact sub.
‘But he is a talented footballer and I have the opportunity to bring him back.
‘We have a big 18 games ahead of us and I think he can help us. He has qualities that I like to see in a young footballer.
‘He has come through the system. He is quick and a goalscorer. All of those ingredients prompted me to bring him back.’
Green scored Pompey’s winning goals at Rochdale and Norwich to set up their FA Cup fourth-round tie against QPR on Saturday.