Toure, 28, whose team mate Emmanuel Adebayor joined City earlier this month, has signed a four-year deal with Mark Hughes' side, the club said on their website.
British media estimated the fee at 16 million pounds.
City are in the market for defenders after compiling an impressive forward line in the close season.
"It is no secret that we have been looking to strengthen our defence and in Kolo I feel we have recruited a world class player," said City manager Mark Hughes.
They have also had bids rejected for Everton defender Joleon Lescott and Chelsea and England captain John Terry.
The big-spending club have already signed striking trio Roque Santa Cruz of Paraguay from Blackburn Rovers, Argentina's Carlos Tevez and Togo international Adebayor.
England midfielder Gareth Barry has also joined from Aston Villa with the club having now spent over 90 million pounds.
Toure joined Arsenal from Ivorian club Asec Mimosas in February 2002 and won the FA Cup at the end of his first season in 2003.
THE INVINCIBLES
Originally a utility player, he quickly emerged as a first choice centre-back alongside Sol Campbell in a 2004 season which saw Arsenal win the Premier League undefeated with a team dubbed 'the invincibles'.
A second FA Cup the following season was to be Toure's last winner's medal for the north London club, although Arsenal came close to success in the Champions League before losing 2-1 to Barcelona in the 2006 final.
Toure, who made 326 appearances in all competitions for Arsenal, suffered a dip in form last season playing alongside Frenchman William Gallas and British media reported he had a transfer request rejected which he then later withdrew.
"Kolo has been a central figure in a very strong Arsenal team for many years and I have been an admirer of his for a long time," added Hughes. "He is strong, quick, reads the game well and will be an influential figure in the dressing room."
Arsenal have since strengthened their backline with the signing of Thomas Vermaelen from Ajax Amsterdam in a deal worth 12 million pounds and Swiss defender Philippe Senderos has returned to the club from a loan spell at AC Milan.
City, considered the richest club in the world, are bankrolled by wealthy Arab owner Sheikh Mansour bin Zayed al Nahyan and are expected to compete for Champions League qualification next season.
Photograph: Reuters