The 49-year-old has signed a four-and-a-half-year deal at Selhurst Park, taking charge with the London club currently fourth in the Championship table.
Holloway will be in attendance at Palace's home game against Blackburn today, but will not be taking charge of team affairs.
“This is a fantastic opportunity for myself and a fresh start,” Holloway told the club’s website.
“It is sad to leave Blackpool as my time there was the best trip I have been on and leave very proud of what was achieved and I would like to wish them all the best. I just see this as too good an opportunity to turn down.
“I got great energy when I met the club’s owners and just can’t wait to get going. I am bringing in Keith Millen as my assistant who is a Croydon boy and he is as excited as I am about the opportunity.”
Palace co-chairman Steve Parish added: “The board and staff of Crystal Palace are delighted to welcome Ian to south London.
“He's a manager I have long admired and one I believe will bring something fresh and new to our club. I am sure the supporters will be as excited about this appointment as I am and will get fully behind him.”
Blackpool chairman Karl Oyston said he feels no resentment towards Holloway as he departs the club.
"I wish Ian all the best in his new role," Oyston told BBC Radio Lancashire. "He has done a fantastic job for us during his time here and will be remembered as the most successful manager in the club's history.”
Holloway took training at Blackpool as normal on Friday morning, but did not join the team on their journey to Derby.
His departure comes only six months after guiding Blackpool to the play-off final against West Ham, where his side narrowly lost 2-1.