The England youth international has reportedly been on the radar of some of the Premier League's biggest clubs, such as Manchester United and Manchester City, but the newly-promoted Saints have clinched his signature.
Clyne was out of contract at Selhurst Park but Palace will be owed a fee in compensation for his departure due to his age.
Discussions between Southampton and Crystal Palace are ongoing but if a figure cannot be agreed, it will be set at an independent tribunal.
Having appeared in over 100 games already in his young career, Clyne admitted he was thrilled at the opportunity to play in the top flight.
"I'm overwhelmed, really," Clyne told Southampton's official website.
"As soon as I heard that Southampton were in for me, I was happy and I knew that this was the place where I could try to improve my football, further my career and get a chance to play in the Barclays Premier League.
"It's a club with a lot of ambition - the gaffer told me that they would want to be pushing for European football.
"We've got good players here - a young bunch of good, talented players who are destined for the top, so I don't see why we can't do it."
|SAINTS TO SINK?
|5/4||Southampton are 5/4 to be relegated from the Premier League in 2012-13 Paddy Power|
Saints manager Nigel Adkins, meanwhile, was also pleased to have brought the youngster to the club and highlighted the qualities that had attracted Southampton to Clyne.
"We're delighted that we can finally announce that we've brought Nathaniel Clyne into the group to help us kick onto the next level," Adkins enthused.
"There's a lot of work going on behind the scenes all summer and, with [head of recruitment] Paul Mitchell and Nicola Cortese, we work very hard behind the scenes to make things happen.
"For the last three years Nathaniel has been a very attack-minded full-back who bombs on - he's got pace and he's a good one-on-one defender.
"He got into the Championship Team of the Year last year, and for such a young age he has had a lot of first-team football in the Championship.
"All being well, we can push him onto the next level now."