Karim Benzema, 35, won 25 trophies - including five Champions Leagues and four La Ligas - in 14 years with Madrid but they agreed to let him leave his contract a year early.
He scored 354 goals for Real, second only to Cristiano Ronaldo.
Cristiano Ronaldo, who hit 450 Real goals, plays for another Saudi club, Al-Nassr.
"It's a good league and there are many good players," said Benzema. "Cristiano Ronaldo is already there, a friend which shows Saudi Arabia is starting to further progress its level. I am here to win, like I did in Europe.
"I have been fortunate to achieve amazing things in my career and achieve everything I can in Spain and Europe. It now feels the time is right for a new challenge and project."
Al-Ittihad are managed by former Wolves and Tottenham boss Nuno Espirito Santo.
Benzema: "Al Ittihad is a new challenge for me. It's a good league and there are many good players". 🟡⚫️🇸🇦
"Cristiano Ronaldo is already here, he is a friend who shows that Saudi Arabia is starting to get ahead and I am here to win as I did in Europe". pic.twitter.com/oTNUqiMWVt— Fabrizio Romano (@FabrizioRomano) June 6, 2023
Karim Benzema played 648 times for Real after his 2009 move from Lyon and scored with his last touch for the club, netting a penalty in Sunday's 1-1 draw with Athletic Bilbao before being replaced.
On Monday it was announced Al-Ittihad were one of four leading Saudi Arabian clubs to be taken over by the country's Public Investment Fund, which also owns Newcastle United.
Ronaldo's Al-Nassr are another, and so are Al-Hilal, who have been strongly linked to Paris St-Germain's Lionel Messi this summer.
Despite an injury-hit campaign which saw him forcibly withdrawn from France's World Cup squad, Benzema notched 31 goals in 43 games while also providing six assists last season.
Benzema was integral in Madrid's 2021-22 campaign, scoring 27 times in LaLiga and 15 times in the Champions League as the club won both trophies.
The striker is Madrid's second-highest all-time goalscorer behind Ronaldo. The club held an event at its training ground on Tuesday to pay tribute to the Frenchman.