Sharp moves to the Madejski Stadium on a temporary basis after falling out of favour at Southampton and will link-up with former manager Nigel Adkins.
The 27-year-old spent last season on loan at Nottingham Forest, scoring 11 times in all competitions before returning to St Mary's this summer.
Sharp, who has scored 140 career goals, will go straight into the squad for this weekend's fixture at home to Birmingham City.
Reading boss Adkins told the Reading Post: "Billy is a player I had at Scunthorpe. He's a player I took to Southampton and we got promoted.
"He hasn't played for a while now but he's a player I've always admired and would always have in my mind-set to bring to any football club.
"I want to score goals this season and it's about having the strength in depth of players to go and do it."