The Argentina international defender only signed for Atletico from Malaga in July but before he even made an appearance for the club, he has chosen to leave and link up with his former manager at the Etihad Stadium.
With Vincent Kompany ruled out through injury, Demichelis will provide cover at the back for Manuel Pellegrini and offer much-needed competition for places.
"I am delighted to have joined City because I am still hungry for success and want to improve," he told the club's official website.
"I have been in Europe for 11 years now and this was a great chance for me to play in the Premier League with such a big club.
"I don't think there'll be any problems in adjusting to life here. Now I want to repay the manager's faith in me out on the pitch. I can't wait to get started."
