Steve Bruce has been chasing a striker after selling Shane Long to Southampton for £12m and, after a number of setbacks, has finally landed his man in Hernandez, who pens a three-year deal in east Yorkshire with the option for a fourth year.
"Abel is a fantastic signing and highlights just how far the club has come in such a short space of time," said Hull boss Bruce.
"He is an exciting talent and like myself, I’m sure the supporters can't wait to see him in action."
Vincent Aboubakar and Danny Welbeck were linked to the KC Stadium, while Hull saw two bids for Blackburn Rovers captain Jordan Rhodes rejected.
Hernandez, 24, scored 14 goals in 28 Serie B games last season as Palermo were promoted at the first time of asking after suffering relegation in 2013.
However, his top-flight record in Italy is more modest - he has 17 goals to his name from 83 outings.
He has been a Uruguay international since 2010, winning 14 caps and scoring seven times for the Copa America holders.
Hernandez travelled to Brazil as part of Uruguay's World Cup squad, featuring as a substitute in defeats to Costa Rica and Colombia.
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