The Sheffield-born striker joins Dan Harding in making the move from St Mary's Stadium to the City Ground this summer.
The 26-year-old forward scored nine goals for the Saints in their push for promotion following his £1.8 million move from Doncaster Rovers in January, but with the recent additions of Jay Rodriguez and Gaston Ramirez, Nigel Adkins has allowed Sharp to leave the club in order to gain first-team football at Forest.
|FAR FROM A WOODEN PERFORMANCE|
|14/1||Nottingham Forest are 14/1 with Paddy Power to beat Charlton 3-1 on Saturday|
The Kuwaiti businessman tweeted: "I'm honoured to announce that striker billy sharp is to spend the rest of the season on loan with us from Southampton. come on you reds."
Sharp scored in Southampton's last game, a 4-1 win away at Stevenage in the Capital One Cup, and also provided an assist for Tadanari Lee.
The deal follows the admission by O'Driscoll that Forest may be looking for more loan signings after the transfer window closes.
The Forest boss told The Nottingham Post: "We will not get fixated on windows, because we can improve the squad throughout the season, as and when they become available on loan.
"That will happen after the window, probably."