The former Australian Under-21 No.10 made a total of 14 appearances in Premiership ties last season, scoring 58 points, but would in all likelihood find his first team appearances restricted at Bath in the 2003/04 season given that Olly Barkley and Mike Catt are both fit.
"We have two factors to look at here at Bath where overseas players are concerned," Bath's head coach told the Bath Chronicle.
"Before and during the World Cup we can carry three overseas players but after it we're allowed only one. That means we have had to take a hard look at our situation regarding overseas players.
"Allowing Chris Malone to go on loan at Bristol means we are doing the right thing by the player and by ourselves because it is in our best interests to have him playing regular competitive rugby."
Bristol are currently embarking on a rebuilding period having been relegated to National Division One at the end of last season and the presence of Malone would be a major boost to their campaign.
Already familiar with Division One rugby, Malone was a stand-out performer for Exeter Chiefs during his stint with the club in the 2001/02 season, scoring 311 points in 28 appearances for the Devon side and named as their Player of the Season before signing for Bath.