Benalouane, 28, only moved to the Foxes last summer from another Italian club, Atalanta.
But after failing to secure regular game time at the Premier League leaders, he will return to Italy after agreeing to join Paulo Sousa's side on a six-month deal that could become permanent.
A report on tuttomercatoweb.com said Benalouane had hesitated on an initial proposal by Fiorentina but was persuaded after the clubs did not include an obligation to buy on the part of Fiorentina.
The website said Fiorentina will pay Leicester 300,000 euros ($327,000, £227,000) for the player's loan period and can buy him outright for 7m euros at the end of the season.
Fiorentina sit third in Serie A, at eight points behind leaders Napoli.