Swiss international Fernandes, 24, will play under Foxes manager Sven Goran-Eriksson for the second time in his career. He was managed by the Swede when he joined Manchester City in 2007, where he made 59 appearances before joining St Etienne for £2m.
Eriksson told the club's website: "Gelson is hugely experienced. He's an all-round midfielder who can sit and protect, but is also a box-to-box player. He has great energy."
The Swiss international joins Sean St Ledger, David Nugent, Matt Mills, Paul Konchesky, John Pantsil, Michael Johnson, Lee Peltier, Neil Danns and Kasper Schmeichel in City's summer signings lineup.