The 19-year-old, who has been used in midfield and as a striker as well as his natural left-back position during his time at Bramall Lane, will join the Black and Whites squad on Monday.
Blades team-mate Evan Horwood is due to return to Yorkshire when his loan spell with the Raydale Park club ends after Saturday's Scottish Cup fourth-round tie against Morton.
Gretna director of football Mick Wadsworth believes Naughton will prove to be as much of a success north of the border as Horwood.
"We're disappointed to be losing Evan as he has been outstanding for us," Wadsworth said.
"But Kyle will come in and play a similar role. He is a very talented young player and is rated as one of the brightest prospects at the club.
"I've watched him several times already this season and have been very impressed.
"We're delighted he has decided to join us and I am sure he will be a terrific acquisition."