The defender has previously had two successful seasons at Lincoln City. His popularity at Sincil Bank grew dramatically when he helped to stear the League Two club to two successive play off campaigns, including the clubs 2-0 loss in the Play Off Finals to Southend.
The 6ft 3" defender has signed a contract which will keep him at the Walkers Stadium for three years.
The signing will give Kelly more defensive options and add security to the back line after rumours linking fellow Leicester defenders, Richard Stearman and Patrick Kisnorbo to rival clubs.
McAuley will join the Foxes in time for their pre season preparations beginning in July.