The 29-year-old Spaniard, who is currently sidelined with a broken metatarsal, is believed to have asked for the move to Spain, and City were willing to sell after their valuation was met.
Negredo made an immediate impact at City last season after arriving from Sevilla in a £20m deal.
He went on to score 23 goals in all competitions but the last of those came in January as he suffered a loss of form in the second half of the campaign after suffering a shoulder injury.
That slump cost him a place in Spain's World Cup squad but the player himself dismissed claims he was homesick, saying he was very settled at City.
The Liga club issued a statement that read: "Valencia Football Club has reached an agreement with Manchester City Football Club for the loan, with an option to compulsory purchase, the Spanish international striker Alvaro Negredo, considered one of the best attackers of the national and European football.
"The footballer with Valencian family, will be presented tomorrow at the Mestalla. The club invites all Valencianistas to attend the presentation."
His exit leaves City manager Manuel Pellegrini with Sergio Aguero, Edin Dzeko and Steven Jovetic as his options in attack.
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