The left-back joined the Foxes last summer from Rochdale but has struggled to break into Sven-Goran Eriksson's side and has now moved to London Road.
Posh manager Darren Ferguson claims to have beaten seven other clubs to his signature and said: "Left-back is an area we needed to strengthen.
"I have known Tom for a long time and have always thought highly of him. He has good energy and a good left foot.
"He will be here until the end of the season and I am looking forward to working with him."