The 28-year-old has joined the club on a two-year contract to June 2023.
Carter has represented England at every age group from under-17s to senior, winning four full caps and scoring six goals.
The Londoner, who can operate anywhere across the front line, won the FA Cup three times during her time with Arsenal, and scored the winning goal in the 2016 final against Chelsea.
She was also part of the Gunners’ title-winning squad in 2011 and has played in the Champions League.
She joined Reading last season and made 25 league and cup appearances, scoring four goals.
Head coach Hope Powell said: “Danielle is a player I have known and admired for a long time, and I’m really pleased she is joining us for the next stage of our journey in the WSL.
“This is the first time we have paid a transfer fee for a player which reflects the club’s ambition and our desire to bring in quality additions to the squad.
“She’s got bags of experience at the highest level, and I know she will relish the challenge of helping us improve on the progress we made last season.
“Adding to our options in attack was something we were keen to do in this transfer window and Danielle will definitely help us with that.
"I’m looking forward to working with her and wish her all the best with us.”