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.
The 32-year-old admitted that the lure of the Premier League was too hard to resist after two season in La Liga, and he is targeting silverware with his new club.
"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."
Demichelis - who has 37 caps for Argentina - made 45 appearances in all competitions for Malaga last season.
