Versatile defender Kelly - a product of Liverpool's youth system - announced via Twitter on Thursday that he was ending his stay at Anfield to move to Palace.
And both clubs duly announced the deal later in the day, putting the 24-year-old in line for a potential debut against Arsenal on Saturday.
Palace have paid an undisclosed fee and their new arrival provides a welcome boost amid reports manager Tony Pulis could be set to leave the club.
Pulis guided Palace to Premier League safety in hugely impressive fashion last term after succeeding Ian Holloway in November, but is rumoured to be unhappy about a lack of transfer activity.
For his part, Kelly told Palace's official website: "I'm looking forward to playing under Tony and playing regular football again.
"Now is the time where I need to get back to playing week in, week out.
"I'd heard about a potential move at the start of the summer, but I just wanted to concentrate on playing again in pre-season.
"I played a lot of games, which is what I needed. I've been out, fit, but not playing competitively all of last season.
"The fans are massive at any club - they were brilliant at Liverpool - and they seem brilliant here.
"But I've looked around the training ground and all the posters on the wall are about the team. That's what I want, to play for a team."
Kelly becomes Palace's fourth close-season arrival, following the captures of goalkeeper Chris Kettings, striker Fraizer Campbell and experienced defender Brede Hangeland.
Capped once by England, Kelly made 62 appearances for Liverpool.
