Coates, 23, has struggled to make an impact in his three years at Anfield, making just six Premier League starts in his 24 appearances for the Reds.
But Black Cats boss Gus Poyet believes he can get the best out of his fellow Uruguayan and has secured him until the end of the current campaign.
A short Sunderland statement read: "Defender Sebastian Coates has joined Sunderland on a season-long loan from Liverpool. The 23-year-old Uruguay international is the Black Cats' eighth summer signing.
"Coates arrived in England in 2011 from Nacional and made 24 appearances for Liverpool, before returning to Nacional on loan last season."
Coates' signing ends for good the fading prospect of a loan return for Fabio Borini, with Premier League clubs only permitted to loan each other a maximum of one player.
Borini's apparent reluctance to return to Wearside alerted interest elsewhere, with QPR having a bid of around £10m accepted by Liverpool.
The arrival of Coates represented the second piece of business at the Stadium of Light, with French defender Modibo Diakite having earlier left the club by mutual consent, and Alvarez quickly became the third.
The 26-year-old joins on loan until the end of the season after deciding to leave Inter, for whom he has made 90 appearances, scoring 14 goals.
He said: "I’m very happy to be here. It’s a great opportunity, a great club and I’m looking forward to playing in England and playing my part for Sunderland.”
Sunderland confirmed Diakite's exit in a one-line statement on their official website.
Diakite was signed on a free transfer from Lazio last summer but fell out of favour with boss Gus Poyet, making only eight appearances for the club.
The 27-year-old is reportedly lining up a return to Serie A with Fiorentina favourites for his signature.
French defender Valentin Roberge was another to leave Sunderland on loan after a deal was struck with Reims.
The 27-year-old's move to Ligue 1 after just one season and 13 appearances, was confirmed by Sunderland on their official website.
THE VIEW FROM ITALY
Davide Bighiani, Eurosport Italy: "Ricky Alvarez never convinced in his three years experience in Italy. He came here with the nickname of 'Ricky Maravilla' but Inter fans saw only a little of his potential. At the start of the last season, Walter Mazzarri seemed to have found a position for him, in midfield (he usually plays behind the striker or wide in 4-3-3) but he lost his place as soon as injured people came back. Inter fans are now a little relieved to see him leaving."
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