The 26-year-old reunites with Foxes manager Russell Martin, having previously worked under him at Southampton.
Smallbone joined Southampton at the age of eight and spent 18 years with the club before leaving this summer. He made his senior debut in 2020, scoring in an FA Cup victory over Huddersfield Town.
“I'm really looking forward to (getting started). I’m hungry and looking forward to being at Leicester City,” he said.
“I have spent a long time playing under the manager previously. I know a few of the boys here and I’ve played against a few of them in my time so I think that should help me to settle in quite quickly.”
The midfielder made 77 appearances and scored seven goals for the Saints, while also gaining Championship experience during loan spells with Stoke City and Millwall.