The 20-year-old, who watched Sunday's 1-0 Premier League win over Manchester United from the directors' box at Anfield, penned his deal after undergoing a medical at the club's Melwood training ground.
Ilori, who becomes Brendan Rodgers' sixth summer acquisition following Kolo Toure, Iago Aspas, Luis Alberto, Simon Mignolet and Aly Cissokho, told Liverpool's official website: "It feels great being a Liverpool player - coming to the Premier League has always been a dream for me.
"I'm going to try to achieve everything I can. I want to play as much as possible and we'll see what the future holds. I will give my all and try my best to help the team."
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