The Belgium international, who can play at right-back as well as his more natural centre-back role, replaces Jos Hooiveld in the squad as the Dutchman joins Norwich City
The Belgium international centre-back, who can also play on the right of the back line, becomes the eighth player recruited by Saints manager Ronald Koeman this summer, who makes room by sending Jos Hooiveld on loan to Norwich City.
The 25-year-old was part of the Atleti side who unexpectedly won La Liga in 2013-14, his first season at the Estadio Vicente Calderon, but made only 12 appearances for Diego Simeone's men.
"I know him very well because he played for some years for Ajax in Holland and he then made a transfer to Atletico Madrid, where he hasn't been playing an awful lot, which is why he was looking for somewhere else to play," Koeman told the club's official website.
"I think our first conversation was four or five days ago and I told him about our plans, about the ambition of the club and about how we play.
"He is a strong defender and is also very good at building up the play when we play out from the back."
Alderweireld himself enthused: "I had a good talk with the coach. First of all, it was very important for me to play this season and the coach gave me a good solution for that.
"The trainer likes how I play and really wanted me to come here, which is what convinced me to come. I really wanted a trainer that believes in me because that's important.
"I think this is an upcoming club. Southampton put a lot of effort in to get me so now I want to give something back to the club by doing my best to help the team. I want to give everything for Southampton."
The Belgian joins Florin Gardos as an option at centre-back for the Saints, who sold Dejan Lovren to Liverpool for £20 million earlier this summer.
Hooiveld, meanwhile, has agreed a season-long stay at Norwich after Alderweireld's arrival pushed him further down the Saints' pecking order.
The Dutchman was entering the last year of his contract at St Mary's Stadium and is expected to move on once his spell with the Canaries in the Championship is over.