Carr was released a year after he signed a $6 million, two-year deal with the Panthers following a five-year stint as a starter in Houston. But Carr struggled so much when he took over for the injured Jake Delhomme last season that he was eventually demoted to third-string.
Carr leaves Carolina as Muhammad prepares for his second stint with the franchise, a week after he was released by the Chicago Bears. Agent Joel Segal said Muhammad signed a two-year deal, but declined to reveal financial figures.
Muhammad was the Panthers' second-round pick in 1996 and spent nine seasons with Carolina before being released in a salary-cap move. The Panthers struggled to replace him, leaving star receiver Steve Smith to face constant double-teams over the past few seasons.
"I did talk to Steve and he felt like he needs another complement on the other side of him," Muhammad said at a news conference. "He kind of coerced me into coming back. He welcomed me back with open arms. ... We're excited about playing again with each other. We've always maintained our friendship outside of football."
It's unclear what role Muhammad will have in his return to Carolina. He turns 35 in May and had 40 catches last season.
The Panthers hope Dwayne Jarrett, who had a disappointing rookie season, will develop into the No. 2 receiver. Drew Carter and Keary Colbert may not be re-signed after struggling while splitting the starts last season opposite Smith.
But Muhammad remains one of the league's top blocking receivers.
"If I'm the No. 3 receiver, they're going to have a real good No. 3 receiver on the field," said Muhammad, who is 64 yards shy of 10,000 yards receiving in his career.
Carr's release is no surprise. The No. 1 overall pick in the 2002 draft, he was thought to be a significant upgrade over Chris Weinke as Carolina's No. 2 QB. But Carr had a disastrous season after he took over as the starter in Week 3, when Delhomme had a season-ending right elbow injury.
Looking tentative in the pocket, Carr lacked accuracy and then was sidelined with a back injury and two concussions. But even when Carr got healthy again, the Panthers used 44-year-old Vinny Testaverde and undrafted rookie Matt Moore ahead of him.
Carr finished with three touchdown passes, five interceptions and a passer rating of 58.3 before being released for the second time in as many years. The move clears more than $2 million in salary-cap space.
"He did everything we asked, but unfortunately it didn't work out like anyone had hoped or expected," general manager Marty Hurney said. "David is an excellent person and we wish him the best."