The 31-year old Uruguayan midfielder will be added to the Fire's roster pending receipt of his International Transfer Certificate and P1 Visa and will occupy a Designated Player slot.
Fire president of soccer operations Javier Leon was delighted to have clinched the services of the 46-times capped Uruguay international.
"Arevalo is a midfielder with a wealth of international experience," said Leon.
"He provides another talented option for our midfield and will help us make the push for the second half of the season."
Rios made 27 Serie A appearances for Palermo last season and was used three times by Uruguay in the Confederations Cup tournament in Brazil earlier this summer.