The former German international won five Premier League titles and the Champions League among 12 major trophies during his first spell at City between 2016 and 2023.
Gundogan departed the English champions just over a year ago to join Barca.
However, the 33-year-old and the Catalan giants reportedly agreed to rescind his contract after just one season to pave the way for a return to the Etihad on a one-year deal.
"I'm incredibly happy," Gundogan said in a City statement. "Happy to see the team-mates, the staff, people that over seven years I had an amazing time with, a very successful time with. Many ups, a few downs, but in general, an incredible experience.
"When you leave this place like I did last year, you spend a year away, you then start to appreciate the place even more. You realise what you had. You realise how amazing that time was.
"You realise how big the club is -- the best club in the world."
Gundogan's return is a timely boost for City after the departure of Julian Alvarez to Atletico Madrid for a reported fee of up to 95 million euros ($104 million).
"Most of the time the managers say until the transfer window finishes anything can happen and this is the real proof," said City boss Pep Guardiola. "It was a complete surprise."
No doubts
In his sole season in Spain, Gundogan scored five goals and provided 14 assists but Barca failed to win a trophy.
"We know him well, the staff, players and everyone and the quality that he played last season in Barcelona," added Guardiola.
"We didn't have any doubts when the possibility was open and delighted he is back."
Gundogan was Guardiola's first signing when both joined the club in 2016.
He went on to score 60 goals in 304 appearances and will provide experience and depth to Guardiola's squad as they go for a record-extending fifth consecutive Premier League title.
"He doesn't come here to retire or to remember the good memories we had," added Guardiola.
"We have time to have good memories in the future but now it is time to put shoes on and play your best."
Gundogan is City's second signing of the transfer window after the arrival of Brazilian winger Savinho.
"Ilkay is one of the finest professionals I have ever worked with. His dedication to football and his approach to every single training session is something special," said City's director of football Txiki Begiristain.
"To be able to bring him back here is fantastic news for everyone. He will help us in our main objective, which is to win trophies, but he will also be an inspiration to so many."
Gundogan could go straight into the City squad for Saturday's clash against Ipswich with Spanish midfielder Rodri still not match fit following an injury he suffered in the Euro 2024 final.
