Kelly, 29, lost his regular starting place in the Fulham side to Sascha Riether this season. A Republic of Ireland international, Kelly has been at Fulham since 2009 and has made 71 appearances in all competitions for the club.
The defender has signed a two-and-a-half year contract with the Royals but will not be eligible to face West Bromwich Albion this weekend.
Reading boss Brian McDermott told the club's official website: "I'm delighted to have Stephen here. He has played a lot of games in the Premier League and more than 30 times for his country.
"He's the kind of player I've been talking about - someone with great experience, but at 29 still very young in football terms and at a really good stage in his career.
"I know he's going to fit into the dressing room here really well. He's up for the fight, up for the battle, he's hungry, he wants to do well and I know he'll be successful for us.''
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