The 23-year-old joins the Clarets ahead of their 2016/17 Premier League return, which gets under way next Saturday against Swansea City.
Flanagan becomes Sean Dyche's third senior summer signing and moves temporarily to Turf Moor having made 40 career Premier League appearances to date.
"I need to get back to the level I was at and to do that I feel like I need a consistent run of games so I think this is the best opportunity to do that," Flanagan said.
"It's a massive club with passionate fans and I can't wait to get started here now."
A versatile full-back with one senior England cap to his name, Flanagan returned from long-term injury last season to feature five times in the top flight, having agreed a contract extension at Anfield in May 2015.
Burnley return to pre-season action this evening at home against Spanish side Real Sociedad. Their last pre-season outing saw Andre Gray score a hat-trick in a 3-1 defeat of Rangers at Ibrox.
Having won promotion back to the Premier League at the first attempt, the Clarets will kick off their 2016/17 top-flight campaign against Swansea at Turf Moor on Saturday 13 August. View pre-match statistics and head-to-head record.