Murphy, 35, was available following the expiration of his contract at Craven Cottage and has opted to sign for the side relegated from the Premier League last season.
It is reported that the former England international rejected late interest from QPR in order to step down a tier to the Championship.
The offer of a two-year deal at Ewood Park is believed to have convinced Murphy to join Blackburn.
"Being able to bring Danny on board is a massive boost for everyone and I couldn't be more delighted," manager Steve Kean told the club's official website.
"His record is there for all to see. He is a model professional, who has a real hunger to keep on playing football and we are thrilled he has decided to commit his future to us. This as a pivotal signing for us."
Murphy revealed manager Steve Kean's passion for success was one of the main reasons he chose to return to the north west.
"I'm absolutely delighted to be signing for Blackburn Rovers," Murphy said. "When meeting Steve Kean I soon realised the passion, enthusiasm and ambition he has for the club and how much he wants the team to bounce straight back up to the Premier League.
"His desire to get me to the club was a huge factor in my decision to join. The owners were also very passionate about their desire to move Blackburn forward as a club and create a squad that is able to achieve promotion.
"I'm excited about my new challenge and can't wait to get started. I have enjoyed a fantastic five years at Fulham and I'd like to thank the club and the fans for all their support. Now my new challenge is to help Blackburn get promoted and repay the manager's and the owners' faith in me."
Murphy made 169 Premier League appearances in five seasons with Fulham.
He has previously represented Tottenham, Charlton, Liverpool and Crewe.