With forward Wilfried Bony out injured, Pellegrini announced that Iheanacho had been named in the squad for the continental competition at the expense of another long-term absentee, Samir Nasri.
"It's important to bring young players into the first team but they must be good players so that we continue to be competitive," Pellegrini told reporters ahead of Tuesday's Premier League clash with Sunderland.
"Kelechi will be in the Champions League squad. I told Samir Nasri I would take him out of the list as he needs two months more to be fit.
"We need Kelechi now as Bony is injured too. We couldn't take the risk of going into the last 16 game with just Kun (Sergio Aguero)."
City, second in the Premier League table behind Leicester City, face Ukrainian side Dynamo Kyiv in the last 16 of Europe's elite club competition.
They have also reached the final of the Capital One (League) Cup and are through to the fifth round of the FA Cup.
With the club challenging on four fronts, midfielder Fernando has urged his team mates to improve their form on the road to keep alive their hopes of winning all available trophies.
"We have a great team and all the players are focused so I do believe we have a chance of winning all four trophies," the midfielder told the club's website (www.mcfc.co.uk).
"If we improve our performance away and don't concede as many goals I think that will help us win."
(Reporting by Simon Jennings in Bengaluru)
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