The 24-year-old becomes Seattle's third "designated player", joining Sweden's Freddie Ljungberg and Switzerland's Blaise Nkufo as players paid mainly outside of the team's salary cap.
Fernandez's move to the MLS side is subject to receipt of his international transfer certificate but the midfielder, who featured in four World Cup games as unfancied Uruguay reached the semi-finals, said he was delighted with the move.
"I'm very excited to be playing in the U.S. because the football has grown a lot in the last few years and keeps getting better," said Fernandez, who was on loan to Universidad of Chile from Uruguayan club Nacional last season.
Sigi Schmid, the Sounders head coach, said: "Alvaro is a versatile player who can play in a number of midfield positions.
"He brings good energy to the game as well as World Cup experience. He can score and also set up others."
Fernandez follows New York's French forward Thierry Henry and Chicago's Mexican striker Nery Castillo as post-World Cup designated player signings for the North American league.
