The Premier League side had been chasing the 19-year-old for some time, though Barcelona were also interested in signing him.
Jesus has signed a contract which will last until 2021, but he will remain with Palmeiras until the end of this year, teaming up with Pep Guardiola's charges in January 2017.
And the Brazil U23 international is looking forward to developing under the tutelage of the Catalan coach.
Manchester City is one of the best clubs in the world so I'm really pleased to sign," he told the club's official website.
"We have many great talents in the team and a fantastic manager in Pep Guardiola that I can learn so much from.
"I'm looking forward to showing the City fans what I can do and I think we'll have a great future together!"
City's director of football, Txiki Begiristain, believes the club have captured a supreme talent in the youngster who can play anywhere across the front three.
"We are delighted that Gabriel has chosen to join us," he said. "He is one of the most exciting young prospects in world football and plays the game in a spectacular way.
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