The 33-year-old arrived in west London from Manchester United in August 2012 and quickly made an impact, netting 15 goals and being named player of the season.
However, Berbatov has failed to hit the same heights this term and his agent, Emil Dantchev, last month claimed he wanted to leave Craven Cottage.
The Bulgarian forward has now got his wish, Monaco announcing his signing on loan until the end of the season.
"I'm happy, excited and a little bit nervous to be honest," Berbatov told Monaco's official website, www.asm-fc.com.
"I look forward to starting training with my new team-mates and open a new chapter in my career."
Berbatov will wear the number 15 at Stade Louis II, where he will stay until the end of the season, when his contract with the Cottagers expires.
The forward had been linked with a return to former club Tottenham, but will instead join up with a Monaco side second in Ligue 1 and without Colombia star Radamel Falcao for the rest of the campaign due to injury.
Speaking about the addition of Berbatov, Monaco vice-president Vadim Vasilyev said: "Dimitar will bring us all his experience and talent.
"His coming is of course connected to Radamel Falcao's injury. He played in big clubs such as Manchester United and he's a big striker.
"We still have two competitions to play and he will be an asset with Emmanuel Riviere, Valere Germain and Anthony Martial. He has a different profile than our other forwards."
Berbatov was followed out of Craven Cottage on deadline day by Philippe Senderos, who joined Valencia in a permanent move.
The Switzerland international joined the Whites from Arsenal in 2010 and made 68 appearances in all competitions.