Babalj, 23, joins Adelaide until the end of the 2015-2016 season.
"I'm really looking forward to spending the season at Adelaide United working with Guillermo Amor, the coaching staff and players," Babalj said.
"I've always admired the way Adelaide plays football and (am) excited for the challenge this opportunity presents."
Adelaide United CEO Michael Petrillo was delighted to have signed Babalj, who has two Australia caps.
"Eli was one of the first players we put on our list when we started our search for an attacking player so to have been able to secure him is terrific," said Petrillo.
"He will fit well into our style of play and has had a great preparation having been in Holland for the last season or two.
"He's young, hungry to keep developing and was keen to join us. He will provide a different dimension to our attacking play.
"We are also grateful to AZ Alkmaar for their cooperation in facilitating the loan agreement and they have been great to deal with."
Babalj, who is due to arrive in Adelaide on Wednesday, has had two spells with Melbourne Heart (now Melbourne City) either side of a stint with Belgrade club Red Star. He also spent a short time on loan at PEC Zwolle last season.
