The Wigan midfielder, who won the FA Cup with the Latics in 2013, returns to the Premier League for a transfer fee reported to be a record for Neil Warnock's side
The Scotland international has signed a three-year deal at Selhurst Park, with reports suggesting that the Eagles have paid a club-record fee for the former Hamilton Academicals man.
McArthur made 155 appearances for the Latics since joining in 2010 and Wigan boss Uwe Rosler admitted that he was reluctant to allow the 26-year-old to depart the Championship club.
"James is a fantastic professional, we wanted to keep him but the offer was a very good one and we have made a decision which we feel is correct for the long-term benefit of the club," he told the club's official website.
Goal understands that Palace beat off interest from newly promoted sides Leicester City and Burnley to secure the 2013 FA Cup winner's signature.
He becomes the club's second new signing on transfer deadline day after Zeki Fryers joined from Tottenham.