The 31-year-old has agreed to a four-year contract with the possibility to extend for another year, after spending the last two seasons at Selhurst Park.
Mail Sport previously reported that Johnstone was on Wolves' radar after losing his regular place on the pitch to Dean Henderson following the arrival of Oliver Glasner.
Last season, the England international featured on only 20 occasions for Palace, and has yet to make an appearance this campaign after being sidelined against Brentford, West Ham, and Norwich City on Tuesday.
Meanwhile, Gary O'Neil's side sought to strengthen their goalkeeper position after Jose Sa conceded six goals in a disappointing home game against Chelsea.
The 31-year-old England international has agreed to a four-year contract which includes an option to extend it for a further year
Wolves announced the player's signing with a futuristic video at Molineux on their official X (formerly Twitter) page, captioning it with: 'Your new home, @samjohnstone' alongside a stadium emoji.
Speaking on the 31-year-old player's arrival, Wolves sporting director Matt Hobbs stated: 'It's great for us to have a player with a huge amount of Premier League experience and an international goalkeeper.'
'It's an area of the pitch we wanted to add more competition and, for us, it's finding the right balance between the level of investment, what it adds to the squad and what it enables us to do for the rest of the squad.
'Sam's at a good age – goalkeepers come into their prime a bit later – and what happens from here will be up to the boys in the building, but for us to be able to add someone like him is valuable for us.'
Johnstone has previously featured for several Premier League sides, such as West Bromwich and Aston Villa.
The Arsenal player is reportedly interested in the move after talks with Marseille and Nottingham Forest collapsed.