The Argentina midfielder moves to the Premier League from Inter, where he has scored 14 times in 90 appearances.
An left-footed attacking midfielder, Alvarez becomes Sunderland's ninth summer signing and their second on deadline day following a similar deal for Liverpool defender Sebastian Coates.
He said: "I’m very happy to be here. It’s a great opportunity, a great club and I’m looking forward to playing in England and playing my part for Sunderland."
Alvarez has been capped seven times by Argentina and was part of his country's squad for this summer's World Cup finals.