The 25-year-old Northern Ireland international scored five Super League goals in a single season with Sion, who were managed for part of the 2012-13 campaign by recently-appointed Rosanero coach Gennaro Gattuso.
A statement published on Palermo's official website read: "Palermo announce the signing of Kyle Lafferty from Sion. The Northern Irish striker has signed a three-year contract."
Lafferty moved to Switzerland from Ibrox during the fall-out from Rangers' transferral to Charles Green's newco following the club's liquidation in June 2012.
The Enniskillen-born forward had scored 31 league goals in 104 appearances across four seasons with the Glasgow club after leaving Burnley for £3million in 2008.
During his medical on Thursday, Lafferty revealed he had been close to agreeing a move to Sicily from Sion in the last transfer window.
"I'm delighted to be here," he said.
"Palermo tried to sign me in January but unfortunately we couldn't close the deal. Now I can't wait to get started.
"When I was younger I watched a lot of Italian football and I know there's a very passionate fanbase here at Palermo."