The 29-year-old, who has 53 caps for England, is out of contract at City and will join Liverpool on a free transfer on July 1, the Premier League club said on its website.
While the signing of a hard-working player who won two Premier League titles at City in five years since joining from Aston Villa is a coup for Liverpool, it also signifies the start of a squad makeover at City.
City's ageing squad finished eight points behind champions Chelsea in the Premier League and Manuel Pellegrini will be given a large budget to freshen things up this summer, having been restricted by UEFA's Financial Fair Play (FFP) rules during the last two windows.
Last season City's starting 11 regularly averaged nearly 30, with the likes of Yaya Toure, Pablo Zabaleta, Martin Demichelis and Fernandinho all 30 plus.
Milner, however, still has plenty to offer and was arguably one of City's best performers last season so his capture is a boost for manager Brendan Rodgers who will be under pressure to get Liverpool back in the top four next season after finishing sixth in this campaign.
(Reporting by Martyn Herman; editing by Sudipto Ganguly)
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