Irish midfielder Stephen Ireland moved to Villa Park as part of the deal.
The fee was undisclosed but local media valued the transfer fee for the 24-year-old at Milner at 24 million pounds based on a 16 million payment and an eight million valuation of Ireland.
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"I am very happy to have James with us, everybody knows we have admired him for some time," City manager Roberto Mancini told the club's website.
His progress stalled at St James' Park, however, and after spending a period on loan at Villa, he eventually moved to the Midlands club two years ago for 12 million pounds.
Able to operate wide or in central midfield, he made his England debut in August 2009 and became an established member of the national team during the 2010 World Cup finals. "He is an excellent midfielder who can play in a number of positions... he has proved he can play at the very top level," Mancini said.
"But he is also young and a good character, I think he can also improve and be a great player for Manchester City for a long time."
Ireland spent eight years at City, having come through the ranks as a teenager and was voted player of the year in the 2008/09 season after becoming a fans' favourite for his energy and commitment.
"I'm really excited, I've only been here a day but I know what it is about already," he told Villa's website.
"I have plenty of personal ambitions. I want to get back to playing the way I can - I haven't played 90 minutes in nearly nine months.
"I've kind of forgotten the feeling of what it is like to come off after a game feeling tired so I want to get back to playing at the top of my game and I want to work hard for my team mates."
