The Serie A giants have agreed to pay around £20 million for the player, with some of the fee being made up by bonuses.
City have so far made no comment on the matter, but Milan have confirmed via official channels that Balotelli will arrive in Italy on Wednesday to undergo a medical.
The Italian club say Balotelli has agreed a four-and-a-half year contract.
"Transfer agreement for Balotelli signed with Manchester City. Medicals tomorrow in Milan, then personal terms until 2017," Milan director Umberto Gandini said on Twitter.
Balotelli joined City from Inter Milan in 2010 for around £24m and has had a sometimes troubled time at the club, including clashes with manager and compatriot Roberto Mancini and disciplinary issues.
However, he helped City win the FA Cup in 2011 to end their 35-year wait for a trophy and also assisted Sergio Aguero for the goal that won the Premier League in injury time of the final day of last season.
Tuesday's news brings to an end a remarkable two-and-a-half-year stay with City, during which time the forward has attracted almost as many headlines for off-field incidents as success on it.
Tales of the 22-year-old blowing up his bathroom with fireworks or walking into a school asking for the toilet have amused British fans but City supporters have felt shortchanged after he netted just 20 league goals since move from Inter.
Going back to Italy will be no walk in the park though for Balotelli, with Milan owner Silvio Berlusconi recently saying his fifth-placed Serie A side did not need a "rotten apple" like the combustible forward. Berlusconi later apologised.
Controversy also followed Balotelli while at Inter where team-mates once assaulted him for wearing Milan colours. He also got into trouble for turning up at a northern Italian prison and asking to look around.
Even the wily Jose Mourinho, Inter's 2010 Champions League-winning coach, labelled him "unmanageable".
Italian leaders and champions Juventus - whose fans racially abused Balotelli when he was last in Serie A - were also interested in signing him after he shone for the national side at Euro 2012.
He leaves City having scored 30 goals in 80 appearances for City, as well as picking up four red cards.