"I've been after him for years," boss Neil Warnock told Palace's website.
"I have always thought he was a quality player and we have missed a dead-ball specialist since Ben Watson went. His dead-ball quality is very good."
Warnock has revealed he tried to sign Ambrose when he was Sheffield United's manager, adding: "I was even prepared to offer up to £1m before he went up to Newcastle in 2003 when I was at Sheffield.
"He can play five out of six positions whether that is 4-4-2 or 4-3-3.
"So he is very flexible and all I am asking him to do is play with a smile on his face because I think he has been down in the doldrums the last couple of years."
After leaving Ipswich in 2003 Ambrose has played Premier League football for Newcastle and Charlton and has 10 England U21 caps.