The 20-year-old, a former England U17 international, joined Palace last summer and made his debut in an FA Cup tie against Stoke, before making a big impression when sent on loan to Plymouth.
The Tottenham-born youngster scored six goals in 14 games for Argyle and was named the League Two Player of the Month for March.
He spent time at Arsenal, Spurs and Blackburn Rovers as a youth player before signing as a pro for Liverpool, and MK Dons boss Karl Robinson says he is well aware of Banton's abilities.
"Jason is someone I have known for a while from my time at Liverpool and Blackburn," he said.
"He is a very gifted footballer who is yet to reach his full potential but showed glimpses of what he can do while he was on loan with Plymouth last season.
"I would like to thank (Palace manager) Ian Holloway for helping this deal happen, and I believe that, with someone like Ian watching over Jason, he could be a great success in the game."