The deal will see the 20-year-old midfielder remain at Portman Road until January 2015, having spent the second half of last season with the Tractor Boys.
Having made over 50 appearances for Palace since graduating from their academy system in 2011, Williams has also won six full caps for the Welsh international side. Despite his promising talent, he has struggled to break into the Eagles first-team since recovering from injury in 2013, making nine appearances last season, and just two substitute appearances this term - with just one since the return of Neil Warnock as manager.
His switch to Ipswich was completed the day before the Tractor Boys took on Sheffield Wednesday, and Williams spent a 30 minute spell on the pitch, scoring four minutes after his arrival just after half-time - although he was later substituted due to a fitness issue.
The move allows Williams to work his way back up to full fitness, and back into the Eagles first-team, and Warnock revealed that Ipswich gave the youngster the best option to impress.
Speaking to the Daily Star, Warnock said: “There were four or five clubs after him. I just know that Mick [McCarthy, manager] is going to play him in the hole and it is where I want him to play.
“He is probably going to miss just a couple of games for us before we can have him back. Jonny was not getting on the bench, as we have done well in that area.
“I think it is better for a young lad to go out and get games. But we can bring him back with the 28-day recall clause.”
Warnock has shown incredible foresight to choose the move based on Williams breaking back into the first-team, with the talented youngster clearly a big part of his future plans at Selhurst Park. It will delight the Palace faithful to know that their highly rated prospect is not being thrown to the wayside, and is being actively encouraged to work his way back into contention for the Eagles Premier League campaign.