The 20-year-old could make his debut in tomorrow’s opening Checkatrade Trophy group game against Blackburn Under-23s at Highbury.
Dempsey joined Huddersfield from Carlisle United on a three-year-contact last summer and made 24 appearances for the Terriers last season, 21 of them in the Championship.
Town say that they beat off interest from rival League One clubs to secure Dempsey’s signature and head coach Uwe Rosler is pleased to have boosted his midfield resources.
Rosler said: “We are delighted to have Kyle on board. He is a very talented player, who arrives with experience of playing in the Championship last season and superbly in League Two before that.
“I’m delighted David Wagner (Huddersfield head coach) has trusted us with one of his top young talents.
“Kyle is an ambitious and tough player, who has the right mentality for what we are trying to achieve here.
“He will give us lots of energy, a goal threat and real quality from set-pieces.
“We feel his ambition will not only drive his own career forward but also our club.”
Cumbrian Dempsey, who turns 21 next month, made his League debut for Carlisle in January 2014 and made 51 appearances, scoring 11 goals, before his £300,000 move to West Yorkshire.
Dempsey, whose last competitive game was in April, tweeted: “Delighted to have signed for @ftfc. Looks a great club and team.Cannot wait to get the shirt on and get back playing football.”