City manager Nigel Pearson said: “Riyad is a pleasing addition to a squad that already has a lot of quality and I’m delighted we’ve been able to secure his signature.
“Whenever we look to add to our squad, it has to be a player that will improve us while complementing what we already have and Riyad certainly fits that description.
“He is a talented player, technically very good, and he gives us another option in attacking positions.”
A French-Algerian, Mahrez joins City following an impressive spell with Le Havre, for whom he made 20 appearances during the opening half of the French season, scoring six goals and providing a further five assists.
Mahrez links up with Nigel Pearson’s squad following an impressive 4-1 win over promotion rivals Derby County, which strengthened the Foxes' position at the top of the Sky Bet Championship table.
He is the second member of City’s squad to arrive from France, after fellow wide-man Anthony Knockaert joined the Foxes from Guingamp in the summer of 2012.
Subject to the completion of the relevant documentation, Mahrez could make his City debut next Saturday, when the Foxes travel to Leeds United in the Sky Bet Championship.