The 22-year-old made more than 100 appearances for the Italian giants following his arrival from Padova in 2011 -- scoring 27 goals in all competitions.
The mercurial forward scored 16 goals in 37 league fixtures in a breakthrough season in 2012-13 but a series of injuries restricted him to just 24 Serie A appearances over the last two seasons.
"It is a great feeling to sign here in the Principality. I am very pleased and very touched," El Shaarawy, who has an option to make the move permanent after one season, told the club's official website (www.asmonaco.com).
"I thank the President of AS Monaco for this opportunity. I hope to have a great season with AS Monaco and give pleasure to the fans."
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Monaco finished third in Ligue 1 last season as well as reaching the quarter-finals of the Champions League.
El Shaarawy made his Italy debut in 2012 against England and has since made 13 appearances -- scoring his only goal in a 2-1 friendly victory against France in 2012.
Monaco vice president Vadim Vasilyev said the player's arrival marked "a highlight of our recruitment strategy".
(Reporting By Tom Hayward in London, editing by Alan Baldwin)
