Italian and Saudi newspapers had been reporting that the 34-year-old Portuguese midfielder, whose contract with Inter Milan expires at the end of the season, was on the brink of moving to the Jeddah-based club.
Inter Milan dismissed the report several days ago, saying in a statement on its website that there was no negotiation under way.
"The negotiations took almost two-and-a-half months. To get a player of such skill and prestige takes time"
Rafat Turki, the Ittihad director-general
Inter coach Roberto Mancini, who was in Bahrain with his team for a training camp and a friendly against Bahrain's national team, said that Figo would stay at least until his contract expired at the end of the year.
However, Turki said Ittihad had clinched the deal in the Gulf state on Thursday night.
Talks were delayed because Figo demanded he be paid 70 per cent of the agreed sum in his first six months at Ittihad, during which time he will be allowed to end the contract for any reason.
"The negotiations took almost two-and-a-half months. To get a player of such skill and prestige takes time," Turki said.
Figo began his career at Sporting Lisbon and played for Portugal in the 2006 World Cup. He played for Barcelona and Real Madrid before joining Inter at the start of the 2005-6 season.