The 23-year-old has moved to the Madejski Stadium after the Royals paid an undisclosed seven-figure fee to secure his services.
Nottingham Forest were also interested in signing Mills, but he chose to move to Berkshire instead.
Manager Brendan Rodgers said: "Matthew is a well-coveted player; a player that a number of clubs were looking at - and he senses that his development will be best suited here.
"He's the type of centre-half I like, first and foremost I like them to defend, but I like centre halves that can be with a ball. He's a player that doesn't get rid of the ball, he passes it and he is that type I like. He fits the mould really well for where we're trying to go as a club in the next couple of years."
Director of Football Nick Hammond added: "Matthew is the right type of player for our club; he is young and hungry, but at the same time he has already gained very good experience in his career.
"He is a talented player and most importantly, with all the interest in him, he has shown enormous desire to join Reading Football Club."