The 29-year-old was released by Betis at the end of December and has signed an 18-month deal with the Rosanero, making him the club's sixth acquisition this month.
According to A Bola, the Portugal international will be unveilved in Sicily on Tuesday along with Mauro Boselli, who completed a loan move from Wigan Athletic.
The Cape Verdean-born Nelson had been previously linked with a move to Brazilian-side Vasco Da Gama but Palermo swooped first to land the defender.
Nelson, a right-sided attacking full-back, will be counted on to inject some life into a Palermo team that has scored only 19 goals in 22 Serie A matches this season, resulting in the Rosanero languishing 19th in Serie A.
The former Benfica defender is the latest in a series of new faces to arrive at Stadio Renzo Barbera with club president Maurizio Zamparini hoping his latest recruits can aid Palermo's survival challenge.
Nelson has been capped by the Portuguese national team three times.