The 19-year-old shot-stopper had been linked with moves to Chelsea, Manchester City and Fulham but opted to join up with Tony Pulis at the Britannia Stadium.
Butland represented the Team GB Olympic football team in the summer, before making his debut for Roy Hodgson's Three Lions against Italy, making him England's youngest ever goalkeeper.
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The Potters have announced that the deal could be worth a total of £3.5 million.
The Bristol-born goalkeeper has been included in Roy Hodgson's Three Lions squad to face Brazil on February 6 at Wembley Stadium.
Meanwhile, the Potters have allowed defender Matt Upson join Brighton for the rest of the season.
The former England international signed for Stoke in the summer of 2011 and will stay at the Amex Stadium for any potential play-off clashes.
Birmingham have also confirmed the loan signing of Bournemouth striker Wes Thomas for the rest of the season. He had previously been at Blackpool.