The move reunites winger Puncheon with his former Blackpool manager Ian Holloway.
The 27-year-old, who moved to St Mary's from Plymouth Argyle three years ago, has made 80 appearances for Southampton but was not part of Mauricio Pochettino's squad for the clash at West Brom on Saturday.
Puncheon, who began his career at Wimbledon, played in the Premier League under Holloway at Bloomfield Road during an 11-game loan spell in 2011 and was on Palace's books as a child.
He told the club website: "I think it's a great move for myself to come and play games. Obviously Crystal Palace are my hometown club and more importantly Ian Holloway is here as well.
"I know Ollie really well. He was a massive factor in this move. He knows the league. He's done it before and I think he will learn from his time at Blackpool and bring it into the team here.
"I actually played for Crystal Palace as a kid when I was eight. I left and there were a few times in my career that I was due to come back but didn't. Now I'm here that's the main thing.
"I've always as a young kid dreamed of playing at Selhurst Park, so it's a young boy's dream coming true."