The 21-year-old, who represents Germany at youth level, will sign a contract which ties him to Dortmund until June 2022.
Liverpool had also been linked with the classy passer but Dahoud has decided to join the burgeoning ranks of young prospects at Dortmund.
Sporting director Michael Zorc said:
Mo Dahoud is a highly talented and exciting player in central midfield, who we have been watching intensively for several years. He has already demonstrated that he can play at the top level.
Dortmund have reportedly agreed to pay €10 million (£8.6m) for Dahoud, whose contract was due to expire in one year.
Read the full article on eurosport.co.uk: Top prospect Dahoud to join Dortmund talent factory