"Mathieu has signed a three-year contract," Lyon president Jean-Michel Aulas told a news conference.
Playmaker Valbuena, who has 48 international caps, moved to Dynamo Moscow last year following an eight-year spell at Olympique de Marseille, with whom he won the French title in 2010.
French media said the 30-year-old had asked to leave the Russian side after they were banned from this season's Europa League for failing to comply with the Financial Fair Play rules.
"I have always behaved in a professional manner at Marseille. I have no regrets to join Lyon," Valbuena, whose number 28 shirt was withdrawn by Marseille following his departure, told reporters.
Valbuena is the fourth signing for last season's runners-up Lyon after Brazil full-back Rafael and Frenchmen Claudio Beauvue and Jeremy Morel.
The seven-times French champions want to sign a centre back ahead of their Champions League return after a three-year-long absence from Europe's premier competition.
They have made unsuccessful bids for Cameroon international and Marseille defender Nicolas Nkoulou.
"We would be very happy if Nicolas Nkoulou can join us but we have kept talking to other players," Aulas said.
According to media reports, they are close to signing AS Roma and France's Mapou Yanga-Mbiwa.
Lyon drew 0-0 at home to Lorient in their opening Ligue 1 match on Sunday.
(Reporting by Tommaso Mazzanti and Gregory Blachier, editing by Pritha Sarkar and Justin Palmer)
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