The 54-year old Spaniard, who established his coaching career in the Spanish leagues, joins from Qingdao Huanghai, having helped the Club be crowned Chinese League One champions and so helping them achieve promotion to the Super League.
Once the youngest coach in La Liga history, Lillo has managed a number of world class talents during his career, including Andres Iniesta, David Villa and Yaya Toure.
He also managed City boss Pep Guardiola towards the latter end of his playing career, during their shared time in Mexico at Dorados de Sinaloa.
Lillo said: “I am delighted to have joined Manchester City’s coaching staff.
“My relationship with Pep goes back many years and I am thrilled to be joining him as part of this exciting team.
“Manchester City has enjoyed much success over recent seasons and played a brand of beautiful football we have come to expect from this club and its manager.
“It’s a pleasure to become a part of this group and I hope to make an important contribution to the club’s success going forwards.”
Director of Football Txiki Begiristain added: “We are delighted to welcome Juanma to Manchester City.
“His vast experience working across three continents and with some of the most famous names in world football will be an invaluable asset to Pep and his team.
“We look forward to him playing a vital role as we return to football.”