The move reunites the Wales player with manager Brendan Rodgers, who left Swansea for Anfield in the close season.
The two clubs had an agreement that Rodgers would not target any of his former Swansea players for 12 months but the Welsh side can agree to any deal in the interests of the club.
Allen is the second player Rodgers has brought to Merseyside after Italy striker Fabio Borini arrived from Serie A side Roma.
He has been capped eight times by Wales and represented Britain at the London 2012 Olympic Games.
Elsewhere, Liverpool are weighing up whether to pursue a £10million deal for Atletico Madrid defender Diego Godín, as Daniel Agger gets set to leave, according to reports.
The Reds are resigned to losing Danish centre-half to Manchester City after they agreed to met their £22million asking price, and as such, Rodgers is on the lookout for a replacement.
Rodgers has been promised all the money from the sale of any players and knows the £22million City are ready to pay is more than enough to bring in at least two new recruits.
The Reds boss is looking to use part of the fee from the sale of Agger to bring in Uruguay defender Godin, who has been told by current club Atletico that he can leave if they receive £10million.
Rodgers has earmarked Godin due to the 27-year-old's similarities to Agger, coupled with his lower wage demands, which would give the manager more room to maneuver elsewhere.
This story has been reproduced from the media. It does not necessarily represent the position of Liverpool Football Club or Red's Fury™ blog.
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