The 20-year-old impressed in Uruguay's Copa America win in July and has signed a long-term contract at Anfield.
A 6ft 6ins centre-back, Coates passed a medical and secured a work permit and is Liverpool's sixth summer signing.
Coates was last seen on the pitch in Buenos Aires celebrating victory in the Copa America, and accepting an
award for the best young player of the tournament. Impressive credentials for a player who is not 21 until OctoberRead more from Tim's blog
He joins compatriot Luis Suarez, who tweeted: "I want to welcome Coates, partner in the Uruguay team, friend and great player," at Anfield.
Liverpool boss Kenny Dalglish was keen to strengthen his defensive resources after Greek defender Sotirios Kyrgiakos left for Wolfsburg on a free transfer.
Manchester City were strongly linked with Coates but he has now joined a Liverpool squad recently bolstered by the arrivals of midfielders Jordan Henderson, Charlie Adam and Stewart Downing, goalkeeper Doni and defender Jose Enrique.
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