Chelsea are reportedly set to follow the Premier League leaders with the project quickly unravelling under political pressure and the disgust of managers, players and fans.
In a statement, City said: "Manchester City Football Club can confirm that it has formally enacted the procedures to withdraw from the group developing plans for a European Super League."
City and Chelsea were two of 12 leading European clubs to sign up to the breakaway competition designed to guarantee billions of dollars for its founding members without the need to qualify through performance on the pitch.
Manchester United, Liverpool, Arsenal, Tottenham, Juventus, Inter Milan, AC Milan, Real Madrid, Barcelona and Atletico Madrid were the other 10 sides to agree to join the European Super League (ESL).
The withdrawal of City and Chelsea could leave the project dead in the water.
Reigning European champions Bayern Munich and French giants Paris Saint-Germain both came out strongly opposed to the breakaway league -- damaging the legitimacy of the project further.
UEFA president Aleksander Ceferin welcomed City's U-turn.
"I am delighted to welcome City back to the European football family," said the Slovenian, who encouraged the breakaway clubs to realise their mistake earlier on Tuesday.
"They have shown great intelligence in listening to the many voices - most notably their fans - that have spelled out the vital benefits that the current system has for the whole of European football."
City manager Pep Guardiola had been among the vocal critics of the plan.
"It's not a sport when the relation between effort and reward doesn't exist," said Guardiola.
"It's not a sport when success is already guaranteed, it's not a sport if it doesn't matter if you lose."
British Prime Minister Boris Johnson, who has vowed to do everything in his power to stop the ESL, also welcomed City and Chelsea's decision to rethink.
He tweeted: "The decision by Chelsea and Manchester City is - if confirmed - absolutely the right one and I commend them for it."
A number of City players took to social media to express their relief at the club's decision to walk away.
"Ok Bye," Raheem Sterling posted on Twitter. "That was quick lol," said French defender Aymeric Laporte.
Chelsea's 0-0 draw with Brighton in the Premier League on Tuesday was delayed by 15 minutes as fans protested outside Stamford Bridge, blocking entry to the team buses.
Fans held up signs reading: "RIP Football 1863 - 2021", "Created by the poor, stolen by the rich", "We want our cold nights in Stoke" and "Roman do the right thing" -- in reference to Chelsea owner Roman Abramovich.
The English Football Association (FA) thanked fans from all clubs for making their voice heard over the past 48 hours to help bring the plan down.
"We welcome the news that some of the clubs have decided to abandon the plans for the European Super League, which threatened the whole football pyramid," the FA said in a statement.
"We would like to thank the fans in particular for their influential and unequivocal voice during this time, holding true the guiding principles of football."