The Scotland international has not started a Premier League match for Villa since the 1-1 draw with Birmingham City on January 16.
Manager Gerard Houllier has brought in Jean Makoun and Michael Bradley during the January transfer window while the return to fitness of Stiliyan Petrov, Nigel Reo-Coker and Fabian Delph has increased competition for places.
Houllier did state last month that he did not intend to let any of his midfielders out on loan but, with a wealth of options in the centre, he now feels Bannan will benefit from regular action rather than sporadic appearances from the bench.
The deal will be until May 7 initially but there is an option to extend it further should Leeds reach the Championship play-offs.
It will be the 21-year-old's third loan spell of his career after previous stints at Derby and Blackpool and the Scot will see one familiar face at Elland Road, as he joins Villa team-mate Eric Lichaj who moved to Leeds on an initial one-month deal on February 9.
Simon Grayson is also hopeful of increasing Lichaj's stay until the end of the campaign, with the defender having impressed in his five games for the club.
But, with Villa having suffered a spate of defensive injuries, Houllier will assess his casualty list before he makes a final decision, although the form of Kyle Walker at right-back has done much to convince the manager that the American should remain at the Yorkshire club.