The Premier League club confirmed the deal for the 24-year-old, who has signed a three-year contract, in a statement on their website (www.hullcitytigers.com).
Hernandez scored 14 goals last season as Palermo won promotion as Serie B champions and he has scored seven goals in 14 internationals for Uruguay since his debut in 2010.
He made two appearances as a substitute at this year's World Cup finals.
"Abel is a fantastic signing and highlights how far the club has come in such a short space of time," said manager Steve Bruce.
The fee for Hernandez broke the previous record of seven million pounds ($11.63 million) paid to Tottenham Hotspur for midfielder Jake Livermore in June, according to media reports.
That move followed just months after the then-record signing of Croatian striker Nikica Jelavic from Everton for a reported fee of 6.5 million pounds ($10.8 million).
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