The 28-year-old Spain international arrives following the departure of Bernabeu legend Iker Casillas to Porto and will provide competition for Keylor Navas and the inexperienced Fernando Pacheco in the first team.
"Espanyol and Real Madrid have reached an agreement in the last few hours for the transfer of Kiko Casilla," read a statement on the Espanyol website.
The deal is reported to involve a payment of around six million euros ($6.54 million) by Real, who retained a 50 percent ownership of Casilla -- a product of their youth academy -- after he moved to Espanyol in 2007.
Casilla has made one appearance for Spain, in November last year when he came on as a second-half substitute in a 1-0 defeat to world champions Germany, but was not included in coach Vicente del Bosque's latest squad.
(Reporting by Tim Hanlon, editing by Alan Baldwin)
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