The Florence club confirmed the transfer on Tuesday and Viola chief Andrea Della Valle insists that the side's spending this summer is not over yet.
Palermo needs to balance the books having been relegated to Serie B last season which sees the Slovenian midfielder join the Viola, though the 25-year-old's contract length has yet to be disclosed.
Fiorentina chief Andrea Della Valle has insisted that the club's summer spending spree will continue, as the club looks to build on signing the likes of Mario Gomez, Massimo Ambrosini, Marcos Alonso and Joaquin.
"Ilicic will arrive and the surprises aren’t over yet," he told fans at a preseason training camp on Tuesday. "We will reinforce the midfield and make this team even stronger."
The transfer of Ilicic, who had been linked with AC Milan and Liverpool, is the first sign of activity from the Florence club since selling Stevan Jovetic to Manchester City earlier in July.
The 22-times capped Slovenia international scored 11 times in 32 Serie A and Coppa Italia appearances last season.