The influential 28-year-old midfielder still had 12 months remaining on his contract at Selhurst Park, but a deal has been agreed with Blues, with the package understood to be worth in the region of £1million in total.
"I'm absolutely delighted and buzzing at the moment. I can't wait to get going," Ambrose told Birmingham's official website. "It's been a hectic few days to get it done but this a positive move for myself at this point in my career and I can't wait."
Ambrose follows in the footsteps of Peter Lovenkrands, David Lucas and Hayden Mullins, who have all been snapped up by recently-appointed Blues boss Lee Clark this week as he begins to mould his squad following the lifting of the club's transfer embargo.
Ambrose, who has penned a two-year deal at St Andrew's with a further 12-month option, has spent the last three seasons with Palace, making a total of 126 appearances and scoring an impressive 39 goals.
Forty two of those outings came last term as he netted 10 goals to top the club's scoring charts, including a memorable strike at Old Trafford to help knock Manchester United out of the League Cup.
Ambrose started his career with Ipswich before moves to Newcastle and Charlton, signing for the Eagles in 2009.