The 28-year-old has signed a three-year contract and committed himself to Blues until the summer of 2010.
He becomes City manager Steve Bruce's ninth summer signing.
Bruce has stressed the need to strengthen his back four - with Aston Villa defender Liam Ridgewell expected to also move to St Andrews within the next 24 hours.
Queudrue will provide competition at left-back for Mat Sadler who recently signed a new three year contract.
He will also be reunited with his former Middlesbrough team-mate Stuart Parnaby, who moved from the Riverside on a Bosman free transfer last month.
Birmingham will pay an initial £2million to the Cottagers but the fee could eventually rise by another £500,000 in add-ons.
Queudrue has plenty of Premier League experience to draw upon in his bid to keep Blues in the top flight after gaining promotion from the Championship.
The France B international joined Boro initially on loan from Lens in 2001 before the deal became permanent the following year.
Queudrue went on to play almost 200 games for Boro, helping them to lift the League Cup in 2004 and the final of the UEFA Cup in 2006.
He made the switch to Fulham in July 2006 and made 32 appearances last season but the arrival of Paul Konchesky from West Ham last week has put his place under threat for the new campaign.
Queudrue joins Fabrice Muamba, Parnaby, Garry O'Connor, Olivier Kapo, Richard Kingson, Daniel de Ridder, Rafael Schmitz and Hossam Ghaly in being part of Bruce's new-look squad.
Blues remain confident Ridgewell will also make the move across the second city after spending six years with Villa in another £2.5 million deal.