The 29-year-old is the 10th new arrival at The Hawthorns in what has been a busy summer for the Premier League club.
Albion have also signed Brown Ideye, Sebastien Pocognoli, Jason Davidson, Joleon Lescott, Georgios Samaras, Cristian Gamboa, Chris Baird, Craig Gardner and Andre Wisdom.
Varela, who has been capped 26 times for Portugal, can play on either wing, and will give Albion boss Alan Irvine options in attack.
“Silvestre is a vastly-experienced player, both with Porto and his national team, and I’m delighted we’ve managed to secure his services,” Irvine said.
“He’s got pace and power, gets his fair share of goals and is also a creator of chances for others.“He’s a fantastic addition to our squad.”