The 24-year-old, who had fallen out of favour under Leicester coach Brendan Rodgers, is to boost Leverkusen's attacking power, with the Bundesliga club struggling recently.
Leverkusen, who only a few weeks ago led the Bundesliga standings, have won just one of their last seven league matches. They lost 1-0 to RB Leipzig on Saturday to drop to fourth place, 13 points off leaders Bayern Munich.
They have already brought in defenders Timothy Fosu-Mensah from Manchester United and Jeremie Frimpong from Celtic in this transfer window.
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"I have seen how Leverkusen like to attack, to play aggressive and how they dominate the game through possession. I fit well in this," Gray said.
There were no financial details available on the transfer, with the player's contract with Leicester running out in the summer.
"Thanks to his experiences from the Premier League, Demarai is a player who can instantly help us," said Leverkusen sports director Simon Rolfes.
Additional reporting from Reuters
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