The 24-year-old, who came through Liverpool's youth system, had been strongly linked with a move to Selhurst Park in recent days, and could be in contention to play at Arsenal on Saturday.
And although there has been no official confirmation of the transfer from either club as yet, Kelly took to Twitter to thank Liverpool and announce his Anfield departure.
"I would like to thank all the managers at LFC for making my wish from the age of seven come true playing for one of the biggest clubs in the world," he wrote.
"Most of all [I] would like to thank the fans for supporting me since my home debut against Lyon in October 2009 even through injuries always by my side.
"Now to start a new chapter of my football career at Crystal Palace a great club with unbelievable fans excited already for the weekend."
Kelly made 33 Premier League appearances at Liverpool, and also spent a spell on loan at Huddersfield Town in 2009.
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