The Foxes have landed the 19-year-old winger on a four-and-a-half year deal from Championship club Birmingham City.
Reports suggest that Leicester met the £3.75m release clause in Gray's Birmingham contract in order to conclude the transfer, which is Claudio Ranieri's first of the January transfer window.
Of the move to the Premier League, England U20 international Gray told Leicester's official website: "It's been my dream to play in the Premier League since I started playing football so I'm very happy to join the club.
"It's a great club. The facilities are great and for a player like me it's an ideal place for me to improve. Meeting all the staff here, it seems like a nice family place, so I think that's perfect for me.
"You can see how well the team has been doing this year and I watch a lot of football so I can see that the way Leicester City play suits my style.
"[Claudio Ranieri] told me what he thinks of me personally, which is nice to hear and about future plans too, because clearly it's early stages of my career and I want to develop and reach the top."
BREAKING: #lcfc sign winger @Demarai7 from Birmingham City. #GrayLCFCpic.twitter.com/Oz61oDPjQy
— Leicester City (@LCFC) January 4, 2016