Gallagher will spend a second season on loan in the Premier League, having made 32 appearances for West Bromwich Albion last term.
The 21-year-old, who is yet to make a first-team appearance for the Blues, will link-up with former Chelsea team-mate Marc Guehi, who made a permanent move to Selhurst Park earlier in July, in a new era for the Eagles under coach Patrick Vieira.
Gallagher said: "I'm buzzing to be here. I can't wait to get started, I'm happy to get the deal over the line.
"I spoke to the manager, I liked what he said, I liked how he wants to play, how he wants me to play and how he wants the team to play. I feel like I can learn from him and the players around me."
Gallagher, an England Under-21 international, has also spent time on loan at Charlton Athletic and Swansea City and becomes Palace's fifth new signing.
Palace chairman Steve Parish, who has already brought in Guehi, Michael Olise, Remi Matthews and Joachim Andersen, expressed his excitement over Gallagher's arrival.
"I am delighted Conor has chosen to come to Crystal Palace on a season-long loan after some impressive performances in the Premier League last season," Parish said.
"We very much look forward to him joining the squad as we continue to build towards the new season."