The 25-year-old Northern Ireland international was a team-mate of new Rosanero coach Gennaro Gattuso at the Swiss club this season.
Lafferty, who was signed by the Ibrox club for around £3.5million in 2008, left Rangers last summer in acrimonious circumstances after a fall-out with Rangers boss Ally McCoist was followed by a constructive dismissal claim.
Lafferty signed a three-year contract with Sion but only scored five times in the Swiss Super League last term.
“We have sealed a deal for Lafferty,” announced Palermo president Maurizio Zamparini on Radio Radio.
“He is someone who can lead the attack by himself, similar to Luca Toni. In Switzerland he hasn’t scored many goals, so we hope he can get them here.
“For the moment we are keeping the same skeleton of the side as last year, plus a few important additions. The system will depend on the players, but we’re thinking of a 4-2-3-1 or a 4-4-2.
Goalkeeper Stefano Sorrentino arrived from Chievo in January and has been linked with Roma.
“We are relying on him and Roma did not ask us for information,” insisted Zamparini.
Palermo were relegated this summer and will be one of the favourites to gain promotion from Serie B next year.
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