The Serie A strugglers have agreed a deal to borrow the 24-year-old who has only been at Ewood Park for 18 months.
Formica joined Blackburn for a reported £3.5m from Newell's Old Boys but has not played for the club since their 4-1 home defeat to Championship leaders Cardiff on 7 December.
He was relegated with Rovers last season and joins a Palermo side second from bottom in Serie A and without a win in eight games.
"Palermo announces that it has reached with the Blackburn Rovers Football Club in an agreement for the acquisition of rights to Mauro Abel Formica," a statement on Palermo's website read.
"The Argentine footballer, born in 1988, will be available to the Rosanero technical staff from Thursday and will be presented on Friday."
Palermo are also reportedly interested in signing Wigan's Argentinian striker Mauro Boselli.