Nugent, 24, brings to Turf Moor a track record as a proven goalscorer, as well as valuable top-flight experience, to increase the striking options in Owen Coyle's squad.
The Clarets manager said: "We are delighted to have got a player of David's stature.
"Portsmouth paid £6m for him and I think we would recognise that it has been a bit stop-start for him and he wants to get his career up and running again.
"We have not had an abundance of strikers, so we have always been in the market and been looking to bolster that department
"We have got someone with a fantastic pedigree and I am sure he will be a tremendous acquisition for the squad.
"He also had two other options from Premier League clubs and came to Burnley, so we are delighted about that."
Liverpool-born Nugent, who has been capped once by England, started his career at Bury and scored 20 goals in just over 100 appearances for the Shakers after coming through the youth system at Gigg Lane.
His pace and eye for goal attracted widespread attention from higher divisions and in January, 2005 he moved to Deepdale for a fee of £100,000.
A massive favourite at Preston, Nugent scored 37 times in a little over 100 appearances and helped North End to the Championship play-offs in 2005 and 2006.
Capped 14 times at England under-21 level, with four goals to his name, Nugent's form for Preston also earned him a call-up by Steve McClaren to the senior squad, making him the first outfield player since Sunderland's Michael Gray in 1999 to be selected for England from outside the top flight.
His England debut came in a European Championship qualifier in March, 2007 when he scored as a substitute against Andorra.
Nugent's status as one of the top marksmen outside the Premier League placed him in great demand. Sunderland and Portsmouth both had bids of £6m accepted by Preston and Nugent opted to move to Fratton Park in July, 2007.
His two-year stay on the south coast has not always been plain sailing but, despite being linked with moves to a number of other clubs, Nugent remained an important member of Pompey's first-team squad and weighed in with half-dozen goals, including the winner at Turf Moor in a Carling Cup tie in September, 2007.
Nugent claimed an FA Cup winners' medal in 2008 when he came off the bench to help Harry Redknapp's side beat Cardiff City in the final at Wembley before returning north to join Burnley just before the transfer window closed.
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