Allardyce, who succeeded the sacked Alan Pardew on December 23, has been desperate to add some new faces in the January window but this was not the signing most fans were expecting.
The former England boss will now work with 57-year-old for a third time, having previously employed the latter as his assistant at Bolton and most recently with the Three Lions.
Palace will be hoping the new number two will bring valuable experience as the Eagles aim to move themselves away from Premier League relegation trouble, with the club just one point and one place above the drop zone.
Speaking on the confirmation of Lee, Allardyce said: "I am looking forward to once again working with Sammy. It was great working with him at Bolton and is someone who has a wealth of experience both at club and international level over the years as well."
Lee will be in the dug-out for Saturday's crucial trip to the London Stadium on Saturday as they take on a West Ham United side that are still firmly involved in a fight for survival.