Paletta, 28, arrived at Milan's La Madonnina clinic on the morning of transfer deadline day and said: "I am very happy to be here."
He will be the latest in a string of January signings for Milan boss Filippo Inzaghi, who has endured a torrid time with his side languishing in mid-table and going out of the Coppa Italia to Lazio last week. Alessio Cerci, Suso, Salvatore Bocchetti and Mattia Destro have all joined the club this window.
Previously he spent three years at Boca Juniors, following a failed spell at Liverpool in the 2006-07 season.
Paletta came through the youth system at Banfield, starring in the first team at the age of 19 before earning his transfer to Liverpool.
While he failed to make an impact in England, Paletta rebuilt his career at Boca and made his Italy debut against Spain in March 2014 before going on to represent the land of his grandparents at the World Cup in Brazil.