Hernandez, 24, has signed a three-year deal, which the Tigers have the option of extending for a further 12 months.
Hull's previous record transfer outlay was the £8m they paid Tottenham for midfielder Jake Livermore in June.
They also completed the signings of midfielders Mohamed Diame from West Ham and Gaston Ramirez from Southampton.
Hernandez has scored seven goals in 14 matches for Uruguay and made two appearances at the 2014 Fifa World Cup.
Tigers boss Steve Bruce said: "Abel is a fantastic signing and highlights just how far the club has come in such a short space of time.
"He is an exciting talent and, like myself, I'm sure the supporters can't wait to see him in action."
Hernandez, who scored 14 goals in 28 appearances to help Palermo win promotion to Italy's Serie A last season, arrives following the £12m sale of Shane Long to Southampton.
His signing takes Hull's summer spending beyond £30m.
Ben Arfa, a 27-year-old France international winger, has spent the past three seasons on Tyneside, having joined the Magpies from Marseille in January 2011 following a successful loan spell.
"Hatem is a superb addition to the squad, and brings a lot of attacking flair," said manager Steve Bruce.
Ben Arfa made 86 appearances for Newcastle, scoring 14 goals.
Hull City have signed Uruguay striker Abel Hernandez from Palermo for a club-record £10m fee, while Hatem Ben Arfa has joined on loan from Newcastle.