City did not release details of the transfer fee but media reports have placed the value of the deal at 34.7 million pounds($44.92 million), which would be a British record fee for a goalkeeper.
Ederson will become the Blues' fourth Brazilian alongside midfielders Fernandinho and Fernando and exciting striker Gabriel Jesus.
City manager Pep Guardiola signed goalkeeper Claudio Bravo from Barcelona last August but the Spaniard's form was patchy. Bravo's back-up and challenger for the keeper spot, Willy Caballero was recently released by City.
England goalkeeper Joe Hart has two years left on his contract at City but after being loaned out to Torino in Italy last season appears to have no future at the club.
City are clearly hoping that Ederson, full name Ederson Santana de Moraes, is the long-term solution to the goalkeeping position.
The club's Director of Football, Txiki Begiristain, said: "We are delighted to bring Ederson to Manchester City. He is one of the best young goalkeepers in Europe and he is an important addition to the squad for next season and the coming seasons.
"He is young, has all the qualities you could want as a top-class goalkeeper and I think he'll fit in really well to our squad."
The 23-year-old keeper has not played for the full Brazilian national team. He previously played in Portugal for second division club Ribeirao and Rio Ave before becoming a starter for Benfica, where he made 37 appearances.
"I like everything about Manchester City. This is a great club, the league they have here in England, and they have amazing fans and they play splendid football. I have always had the dream to play in English football and now I'm going to make it true," Ederson told the club's official website.
Despite some inconsistent form, City finished third in the Premier League last season, qualifying for the Champions League.
"Manchester City has an amazing squad. I think they managed to have a good season. Next season, we will have to be focused to achieve the goal of winning trophies," said the Brazilian.
Ederson is the second major signing of the close-season for City following their purchase of Portuguese midfielder Bernardo Silva for a reported 43 million pounds from Monaco.
(Reporting by Simon Evans; Editing by Amlan Chakraborty and Gareth Jones)
