The 25-year-old stopper, who made the move to Loftus Road from Reading in August and made three appearances in the top flight for them last season, joins the Premier League club for an undisclosed fee.
The former England Under-21 international was delighted to make the move to Selhurst Park, and told his new club's official website www.cpfc.co.uk: "I'm over the moon.
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"When I first heard about Palace's interest I was excited because I really wanted to be back in the Premier League.
"Towards the end of last season I started hearing little inklings about a move and then gradually over the summer things progressed and now, here I am."
McCarthy joined Reading as a 16-year-old, making 70 league appearances for the Championship outfit - also enjoying numerous loan spells - before leaving last summer.
The shot-stopper, who was called up to Roy Hodgson's England squad in May 2013 for the friendlies against Republic of Ireland and Brazil, is relishing playing his home matches at Selhurst Park.
"Every time I've played at Palace the atmosphere has been brilliant," he added. "The fans are excellent and they're so passionate about their club. I'm really excited to be here."
McCarthy becomes Alan Pardew's third summer signing following the high-profile capture of France midfielder Yohan Cabaye, plus the arrival of striker Patrick Bamford on a season-long loan move from Chelsea.