City parted company with Sven-Goran Eriksson on Monday and were immediately given permission to talk to Blackburn manager Hughes, 44, with a compensation package agreed on Tuesday.
Hughes was also believed to be interesting Chelsea after a successful four years at Rovers but has opted to move to Eastlands on a three-year deal.
City's new chief executive, Garry Cook, told the club's official website: "I am delighted to welcome Mark on board. In our view he is the brightest young manager in the game and he was our number one target for the manager's job."
Hughes, who will be presented to the media at a press conference tomorrow morning, agreed to the move after meeting Cook yesterday evening.
Cook himself has only just had his appointment confirmed by owner Thaksin Shinawatra and flew in from the USA to seal the deal.
Cook continued: "He made it clear to us from the moment we met that he shared our vision and ambition to make Manchester City one of the top sides in the country.
"It's a privilege to join Dr Thaksin here at Manchester City. There is no better opportunity in world football.
"The club intends to invest in new players as well as securing the long-term services of key members of the current first-team squad.
"Mark has already identified some of the players and backroom staff that he wants to see here at City, and we will begin the process of recruiting them immediately."