The deal will reunite French international Cabaye with Palace boss Alan Pardew, who was his former manager in his first Premier League stint with Newcastle.
Cabaye joined Ligue 1 giants Paris Saint-Germain in January 2014, but struggled to establish himself as a regular starter in the capital.
The 29-year-old made 33 appearances for the French side last season, but returns to English football after just 18 months.
The £10m club record fee will reportedly rise to £13m with add-ons, and eclipses Palace’s previous biggest buy of midfielder James McArthur for £7m last year.
Cabaye told Crystal Palace’s official website: “I’m happy to be here. I’ve been waiting for the decision, had the medical and now I can’t wait to focus on my new team, a new season and my new life.
“I wanted to come and play for Palace because there are some really strong players here. They finished very well last season and I think they can compete to get into the top eight.
“I also know the gaffer and have worked with him before and I’m confident with him. I want to do my best for him because he’s made a big effort to get me to come here, as well as the Chairman, so I have to say a big thank you to both of them.”
Palace will now turn their attention to other targets after finishing in 10th place in the Premier League last season, with Chelsea striker Loic Remy and Inter Milan winger Xherdan Shaqiri having been linked with a move to Selhurst Park.