Saliba initially signed for Arsenal from Saint Etienne for £27m in the summer of 2019 but was loaned back to the French club for one season.
The 19-year-old returned to Arsenal last summer but is yet to make his debut for the club’s senior side, having been left out of the Premier League and Europa League squads.
Arsenal technical director Edu said: "William Saliba is a player with a huge amount of talent and potential. We're confident he will have a great career with us but we must remember that he is still only 19 years old and has a lot of time ahead of him.
"William experienced a very challenging time last year, with his playing time limited by injury and the early ending of the Ligue 1 season due to the pandemic.
"So together with William, we have decided that spending the rest of the season on loan with Nice is the best way for him to develop. We will be keeping in close contact with William during his time with Nice and look forward to seeing him make good progress until the end of the season."
Saliba is the second defender to leave Arsenal in the winter transfer window on a temporary deal after Sead Kolasinac joined Schalke 04.
Nice, who recently sacked former Arsenal captain Patrick Vieira as manager, are 12th on the French Ligue 1 table.
