The 22-year-old had fallen out of favour at the King Power Stadium and did not feature in any of the Foxes' opening six matches of the season following their relegation from the Premier League last term.
Manchester United had been credited with an interest in the defender as they continue their search for full-back reinforcements, but Sheffield United have now signed him on loan for the rest of the campaign.
Thomas becomes the Blades' ninth signing since they were promoted to the Premier League, joining Cameron Archer, Gus Hamer, Vini Souza, Auston Trusty, Benie Traore, Anis Slimane, Tom Davies and Yasser Larouci through the door this summer.
"When United came in a few days ago, it was an easy decision for me. Coming back to playing Premier League football is obviously what I wanted to do. Coming here is a great experience and I can't wait to get started," he told the club website.
"I had interest elsewhere at the time but then United came along and it was an easy decision like I say - a no brainer really. I can't wait to get going.
"I think this is a huge moment. Getting game time and getting into the team here is a key thing for me. I want to be playing as many games as possible, especially in the Premier League, my career has gone well so far, I've won a few things, so hopefully I can continue that here."
Sheffield United boss Paul Heckingbottom added: "Luke has got a top pedigree, he's a good young player who also has a wealth of experience at Premier League level. What also impressed me was that he was hungry to come in and is keen to get started."
Thomas could make his debut for the Blades when they host Everton in the Premier League on Saturday, with both sides still looking for their first points of the new campaign.
The full-back was part of England's victorious Under-21 side at the European Championships earlier this summer, and also helped Leicester to FA Cup glory in 2021.