Moody previously worked under Malky Mackay at both Watford and Cardiff City before his well-publicised departure from the Welsh club in October, when he was replaced as head of recruitment by 23-year-old Alisher Apsalyamov.
The Kazakh has since stepped down from his role due to issues surrounding his work permit, while Moody is now expected to play a part in the appointment of a new manager at Selhurst Park.
Palace co-chairman Steve Parish told the club's official website: "I have great pleasure in welcoming Iain to the club.
"The role of sporting director will cover all areas of player recruitment and contract management and is an important building block as we move the club forward."
Former Real Madrid coach Aitor Karanka is reported to be heading to London for talks over the vacancy next week, with Palace thought to have missed out on rumoured targets Tony Pulis and Chris Coleman.
And Moody revealed he was looking forward to the task ahead.
"I am very excited by the opportunity I have been offered and would like to thank the club for their faith in me," he said.
"The club has made impressive progress since 2010 and I look forward to playing my part in helping ensure their continued success. I can't wait to get started."
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