The Gunners agreed a deal worth 60m pounds, including 8m in add-ons, for the 27-year-old to become their seventh signing of the current transfer window.
Eze had looked to be joining Tottenham earlier in the window but Arsenal made a move on Wednesday after an injury to Kai Havertz.
It is full circle moment for Eze as he returns to the club where he started his youth career.
He will wear the number 10 shirt at Arsenal and will join up with his new teammates in training after this weekend's match against Leeds.
Arsenal manager Mikel Arteta said: "He is a powerful and exciting player who will give us a new dimension in our attacking game.
"What stands out just as much as his talent and intelligence as a player, is the way he has worked hard throughout his career to get where he is today.
"His journey, his mentality, and his ambition are exactly what we want in our team, and we love how much it means to him and his family to be joining our club. We all look forward to start working with Eberechi soon."
Eze scored 40 goals in 169 games for Palace and claimed 14 goals and 11 assists in all competitions last season, including the only goal in the FA Cup final against Manchester City.
He started the Eagles' Premier League opener at Chelsea last week but missed Thursday's Europa Conference play-off.
Arsenal manager Mikel Arteta has voiced serious concerns over the injuries sustained by key players Bukayo Saka and Martin Odegaard during their dominant 5-0 victory over Leeds United at the Emirates Stadium.
Arsenal, Burnley, Bournemouth and Brentford secured wins in Saturday's Premier League action.
Arsenal manager Mikel Arteta has revealed that Eberechi Eze personally called him to check whether the club was still interested in signing him, just as he was on the verge of completing a move to north London rivals Tottenham.
Real Madrid's talented winger Rodrygo finds himself at the center of transfer speculation as the transfer window nears its climax, with Liverpool now positioned as his primary suitor in the Premier League.
