Following the acquisition of Cyprus defender Jason Demetriou, Etheridge, 25, fills the gap left by Richard O'Donnell's move to Wigan Athletic.
The ex-Chelsea trainee, who has made just 20 Football League appearances, was released by Charlton in May.
"We had a number of good options but Neil stood out," said boss Dean Smith.
"He ticks all the boxes in age, room for development and experience at this level and above," said Smith.
He's an extremely driven young man who wants to be successful. These are the characteristics we're looking for.
"Neil will compete with Craig MacGillivray for a first-team place. They will both push each other on, exactly the kind of competition that we want."
Etheridge, who began his professional career at Fulham, added: "The faith that the gaffer and Neil Cutler (Walsall goalkeeping coach) have shown in me means a lot. Now is the time to get my head down and work hard.
"I have gained plenty of international experience in front of big crowds, but I've not played as many league games as I'd have liked. I intend to rectify that here."
Find all the latest football transfers on our dedicated page.
League One side Walsall have made their second international signing in 24 hours by bringing in Philippines keeper Neil Etheridge on a two-year deal.