The England U21 international was a target for Leeds United earlier this week but Leicester would not countenance the 22-year-old moving to a Championship rival.
Thomas has had plenty of interest but is excited at the prospect of going back to the Premier League.
He is likely to go straight into Paul Heckingbottom's squad to face Everton following injury to Ben Osborn.
Thomas, who is the Blades' ninth summer signing, will wear the No 14 shirt at Bramall Lane.
Sheffield United have announced the signing of Leicester left-back Luke Thomas on loan
The 22-year-old defender will replace wing-back Ben Osborn, out with a long-term injury
Thomas made 17 Premier League appearances last season and now returns to the top-flight
He said: 'When United came in a few days ago, it was an easy decision for me. Coming back to playing Premier League football is obviously what I wanted to do. Coming here is a great experience and I can't wait to get started.
'I had interest elsewhere at the time but then United came along and it was an easy decision like I say - a no-brainer really. I can't wait to get going. I think this is a huge moment. Getting game time and getting into the team here is a key thing for me.
'I want to be playing as many games as possible, especially in the Premier League, my career has gone well so far, I've won a few things, so hopefully I can continue that here.'
Foxes academy product Thomas won the FA Cup with Leicester in 2021 and the Under 21 European Championship in July.
Heckingbottom added: 'Luke has got a top pedigree, he's a good young player who also has a wealth of experience at Premier League level. What also impressed me was that he was hungry to come in and is keen to get started.'
Osborn is to see a specialist in London on Thursday after picking up a groin injury in Sunday's defeat to Manchester City.
Sheffield United assistant coach Stuart McCall confirmed, following their penalty shoot-out defeat to Lincoln City in the Carabao Cup on Wednesday night, that the left-wing back will travel to the capital to learn the extent of the damage.
'I don't think it's a good one,' said McCall of Osborn's injury. 'I think he's actually seeing a specialist tomorrow (Thursday) in London. It doesn't look like it's going to be a short-term one unfortunately... he's certainly done some major damage to the groin area, whether it's a rupture we are not really sure but he's seeing a specialist.'