The 24-year-old will be looking to make his mark at the Mestella after struggling in Italy, where he failed to score in Serie A and managed just three goals in 28 games in two seasons with the Partenopei following a big money move from Universidad de Chile in 2012.
He was loaned out to Brazilian side Gremio last year but has not made a single appearance for Napoli this season, prompting a temporary move to Valencia.
"Valencia CF is a beautiful club and institution. I would like to stay here for a long time and I hope to give my all on the pitch to help this great team move forward," Vargas told the Primera Division club's website.
"My team-mates from Chile have told me that my football will be successful in Spain."
The arrival of Vargas, who has scored 11 times in 27 matches for Chile and could make his debut for his new club against Barcelona, is a huge coup for Valencia, according to president Amadeo Salvo.
"Vargas is a world class player. We are sure that he will have extraordinary results here," he said.