Batshuayi had been linked with West Ham, Real Betis and Tottenham on a manic transfer deadline day for the Belgian.
Tottenham seemed his only route out of Valencia as the deadline loomed after it was revealed that the north London club had held talks with Chelsea.
But those negotiations soon reached a deadlock, and Palace have swooped in.
The Premier League winner has cut his unsuccessful loan with Valencia short to move to Selhurst Park until the end of the season. "This is a fantastic signing for Crystal Palace," said chairman Steve Parish, with the club having handed in a deal sheet to the Premier League to extend the deadline to 1am.
"Michy is a player we've long admired, and I'm delighted that we've finally managed to get him in a red and blue shirt.
"He will be a magnificent addition to our squad."
Batshuayi joined Chelsea in summer 2016 for £33 million from Marseille, and scored the goal that sealed the Premier League title for Antonio Conte's side in his debut season.
He has failed to establish himself at Stamford Bridge however, and now embarks on his third loan spell.