The 23-year-old forward is the Blues’ seventh and final signing of the summer transfer window following the additions of goalkeeper Jonas Lössl, right-back Djibril Sidibe, midfielders Andre Gomes, Fabian Delph and Jean-Philippe Gbamin, and striker Moise Kean.
Nigeria international Iwobi, who has 36 caps and helped his country to the Africa Cup of Nations semi-finals this summer, came through Arsenal’s academy before making his first-team debut for the Londoners in October 2015 at the age of 19.
Everton manager Marco Silva said: “Alex was one of our main targets for this window and I believe he is a fantastic signing for Everton. He is a direct and skilful winger and attacking midfielder who always works very hard for his team.
“He is still young but already with a lot of top-level experience – 100 Premier League matches, more in Europe and many international games.
“It was important for me to have one more quality option for our attacking positions to add to what we have with Richarlison, Bernard and Theo Walcott.
“Alex fits exactly the profile of player I want in my model. He is hungry to join Everton and take the next step in his career, to help us compete with the strongest teams in the league and reach his potential at our club.”
Iwobi, the nephew of Nigerian legend Jay-Jay Okocha, was born in Lagos, Nigeria before moving to England when he was four. Iwobi played 149 games for Arsenal, scoring 15 times and contributing to 42 goals.