The ex-Monaco starlet has been the subject of interest from a host of big European clubs this summer after netting 26 goals for the French champions last season.
Mbappe, who grew up in the Bondy area of Paris, has moved on loan until June 2018 but PSG have the option of tying him down on a permanent deal until 2022.
'It is with great joy and pride that I join Paris Saint-Germain,' Mbappe said after signing his contract.
'For any young person from the Paris region, it is often a dream to wear the red and blue jersey and experience the unique atmosphere of the Parc des Princes. I really wanted to be a part of the club's project, which is one of the most ambitious in Europe.
'Alongside my new teammates, I intend to continue my progression while helping the team achieve the very big objectives it has set itself.'
Real Madrid, Arsenal and Barcelona were all linked with a move for the 18-year-old. But Mbappe, who is currently on international duty with Didier Deschamps' side, has opted to remain in his home country.
He is now expected to make his move permanent next summer, if not before. But with PSG wary about falling foul of Financial Fair Play regulations, the Ligue 1 giants are under no obligation to keep Mbappe beyond this season.
It had been reported that any deal would include an automatic purchase fee of £166m which, given they have already signed Neymar for £198m this summer, meant the club risked surpassing the £30m deficit they are allowed under UEFA regulations.
PSG fell foul of FFP rules in 2014 and could face sanctions such as a Champions League ban for a second breach. But the deal announced on Thursday includes only an option to buy clause.
'It was essential for French football that we keep and help develop such a great talent in our championship,' PSG president Nasser Al-Khelaifi said.
'Under our colors, in the midst of truly great players, Kylian will continue his progression in a way that will also benefit the French national team in the months and years to come. With his arrival, more than ever, our supporters will have plenty to cheer about.'
Former team-mate Benjamin Mendy wished him luck in an Instagram post, referring to him as a 'little poet'.
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