Babel joins from Turkish Super Lig side Besiktas on a deal that runs to the end of the 2018-2019 season.
The former Liverpool and Ajax forward has scored four league goals in 12 appearances for Besiktas this term.
Offering an option out wide or in attack, Babel returns to the Premier League after departing Anfield in 2011.
"My first impressions are good and I'm very excited," the 32-year-old told Fulham's official club website.
"I definitely have faith that Fulham can stay up. That's one of the reasons that I'm here, to try and help that to happen.
"I'm ready to go, I'm excited and I can't wait."
Babel could make his Fulham debut at home to Tottenham in the league on Sunday.
Claudio Ranieri's side are 19th in the table, five points from safety, after winning one league game since November.