The 27-year-old becomes the London side's 15th addition of the transfer window with Cameron Jerome, Barry Bannan and Adrian Mariappa all joining the ranks on deadline day.
The move marks a return to the top flight for the Algeria international, who got a taste of the Premier League while playing for Wolves from 2010 to 2012, shortly before they were relegated to the Championship.
He now has another opportunity to prove himself after impressing for Forest last season, netting three goals in 35 league appearances.
His addition marks the latest signing in a busy window for manager Ian Holloway, with the 50-year-old admitting prior to the deadline that he needed fresh faces in his squad as he attempts to keep Palace in the top flight following their return after an eight-year absence.
Also among the new signings are 22-year-old Dwight Gayle and former Arsenal striker Marouane Chamakh, with both having already found the back of the net in the new campaign.
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