Hammond joined Southampton in 2009, but has been surplus to requirements since the club secured a return to the Premier League.
He spent last season on loan at Brighton & Hove Albion and has now returned to the Championship to link up with Leicester.
"Once I knew of Leicester's interest I wanted to come," Hammond told the club's official website. "My mind was made up.
"There was some interest from other clubs, but once Leicester was mentioned and I spoke to the manager, I wanted to come here.
"It's a massive football club. They came close last year in the play-offs and they've got a good history. It's a club that's going places and wants to push to the Premier League. It's very exciting to be here."
The 30-year-old is Leicester's third summer signing after Zoumana Bakayogo and Ignasi Miquel, and manager Nigel Pearson is happy to have strengthened his squad further.
Pearson said: "We're really pleased to be able to add a player of Dean's quality and experience to the squad.
"As well as having played a considerable number of games in his career, he also arrives with promotion credentials and will be a very positive influence on the squad both on and off the pitch."