The Spanish club have smoothed his path to the Etihad Stadium.
His current contract at La Roselada runs for another two years but it has been reported in Spain that Malaga have agreed to let him go on June 30 without demanding the 4million euros detailed in a release clause.
Pellegrini, 59, managed Real Madrid for a season before taking over at Malaga in 2010 - helping the club qualify for the Champions League and reaching the quarter-finals of this year's competition before being ousted by finalists Borussia Dortmund.