Balotelli's likely move signals a return to the Premier League where he shone, glowered, delighted and dismayed in equal measure during his time with Manchester City from 2011 to 2013.
The 24-year-old Italian is seen as a natural successor to another colourful and controversial player, disgraced Uruguay striker Luis Suarez, who was sold to Barcelona in July for a reported fee of 81 million euros.
Suarez, 27, was the Premier League's top scorer last season with 31 goals for Liverpool before being expelled from the World Cup finals and suspended after biting Italian defender Giorgio Chiellini.
Balotelli signalled the move when he told reporters that Thursday would be his last day in Italy.
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"Today is my last day in Milan and I am going to Liverpool," Sky Italia reported him as saying. His agent Mino Raiola was reported to be in England to complete a reported 20 million euros deal.
Balotelli joined Manchester City from Inter Milan in August 2010 and, after starring in their 2011 FA Cup final win against Stoke City, played a prominent role in the triumphant Premier League campaign of 2011-12 as they won their first top tier title since 1968.
After a series of disciplinary problems including a training ground altercation with then-manager Roberto Mancini, he signed for AC Milan in January 2013.
Balotelli impressed for Italy at Euro 2012 where he scored twice in their semi-final win against Germany and headed Italy's winner against England in their group stage meeting at this year's World Cup.
(Reporting by Tim Collings,)
