The England U-21 star, a product of the Leeds Academy, returned to the club's training ground to complete the formalities of a loan deal on Friday.
He goes into the Whites' squad for the game against Ipswich Town on Saturday.
He will be at Elland Road until February 25 at least although Villa can recall him after 28 days.
"We've been talking for a couple of weeks now with Villa about the possibility of bringing Fab back to the club," Grayson told the club's official website.
"As everyone knows Fab is a talented footballer who did very well here and secured himself a big move on the back of what he did.
"This is a great deal for both parties. Fab will get some football and he is the calibre of player that we've been looking to bring in here.
"I'd like to thank Alex McLeish and Villa for allowing Fab to join us."
The talented midfielder began his career with the Whites, making 46 league appearances before joining Villa.
He was a regular for Villa in the first half of the season, but has not played since December and has been made available for loan by McLeish.