The 36-year-old Australian legend has signed a three-year deal with City after spending the past 16 months in China with Shanghai Shenhua and Hangzhou Greentown.
The deal will see Cahill operate solely as a player for the first two seasons before stepping into a coaching role with City Football Group in the third year.
"I am incredibly excited to have signed with Melbourne City and ultimately the City Football Group," said Australia's all-time leading scorer.
"There is real ambition and purpose here, qualities that are immensely important to me."
"The Club is completely attuned to the opportunity for the game in this country; investing significantly in facilities, the development of young players and in giving back at the grassroots level. For me that makes this the ideal place to be.
"I am here to contribute as much as I can to both the Club and, where possible, to the further development of football here in Australia.
"My immediate focus is on getting to know my team-mates and our pre-season preparations. I'm excited about the quality of the squad that I am joining and the opportunity to win silverware.
"I'm looking forward to the challenge of testing and proving myself in this league."