"I have thoroughly enjoyed my season with the club and I am absolutely delighted to make the move permanent," said Hobbs, who Liverpool signed as a 17-year-old after he had played just three minutes of professional football for Lincoln.
"This is a massive club and I believe we can go all the way to the Premier League. That's one of the reasons why I have committed to signing a four-year deal.
"I couldn't be happier here. Leicester have shown great faith in me and instilled me with great confidence. I really am over the moon."