The 23-year-old has put pen to paper on a five-year contract and becomes the seventh arrival of a busy close season for Everton, the transfer being confirmed shortly after Thursday's deadline.
Iwobi spent four years in Arsenal's first team after coming through the academy and featured 51 times in all competitions last season.
But he seemingly slipped down the pecking order following the club-record signing of Nicolas Pepe and admitted in July he would consider leaving if his playing time was reduced.
Everton manager Marco Silva told the club's website: "Alex was one of our main targets for this window and I believe he is a fantastic signing for Everton. He is a direct and skillful winger and attacking midfielder who always works very hard for his team.
"He is still young but already with a lot of top-level experience – 100 Premier League matches, more in Europe and many international games.
"It was important for me to have one more quality option for our attacking positions to add to what we have with Richarlison, Bernard and Theo Walcott.
"Alex fits exactly the profile of player I want in my model. He is hungry to join Everton and take the next step in his career, to help us compete with the strongest teams in the league and reach his potential at our club."
Everton had been linked with Wilfried Zaha but were reportedly twice knocked back by Crystal Palace.
Marco Silva's side begin their Premier League campaign with a trip to Selhurst Park on Saturday.