The 21-year-old, who has represented the Republic of Ireland at U19 and U21 levels, previously spent loan spells with Burnley and Scunthorpe.
He made four Premier League appearances for Everton during the 2011-12 season but added only one more last season and finds himself well down the pecking order at centre-back, having not featured since the FA Cup fifth-round tie with Oldham in February.
Yeovil boss Gary Johnson said: "When we knew Shane was available for loan we immediately enquired about bringing him to Huish Park.
"With one of our centre-backs injured and another suspended we didn't want to turn down the opportunity of signing Shane.
"This signing suits all parties and as always we are very grateful to Everton Football Club."
Duffy goes straight into the Yeovil squad for their trip to Bolton on Saturday.