The draw held on Friday paired both clubs in the round of 16, marking the fifth straight season they will clash in the competition.
Defending champions Paris Saint-Germain (PSG) were drawn against Chelsea in another standout tie.
Real Madrid, who have won the competition a record 15 times, will host the first leg against City at the Santiago Bernabéu next month before travelling to England for the return leg a week later.
The two sides already met earlier this season during the league phase, when City, coached by Pep Guardiola, secured a 2-1 win in Madrid in December.
City finished eighth in the league phase standings, which allowed them to qualify directly for the last 16.
Madrid came ninth and had to go through the play-offs, where they defeated Benfica 3-1 on aggregate to book their place.
This will be the eighth season since 2012 that both teams have faced each other in Europe.
Madrid knocked City out last season and also eliminated them in 2024 on their way to lifting the trophy.
They had previously beaten City in the 2022 semi-finals, while City came out on top at the same stage in 2023.
PSG will begin their tie against Chelsea at home after edging past Monaco 5-4 on aggregate in the play-offs.
Chelsea advanced automatically after finishing sixth in the league phase.
The two clubs have a history in the competition, having met three years in a row between 2014 and 2016.
Chelsea won the first meeting, but PSG won the next two. Their most recent encounter was in July’s Club World Cup final in the United States, where Chelsea beat the French side 3-0.
PSG manager Luis Enrique described the draw as exciting, saying it would be interesting to face one of England’s strongest teams.
He stressed that the match is not about revenge, as it is a different competition.
Chelsea have been under the leadership of Liam Rosenior since January.
He previously coached Strasbourg in France and faced PSG during his time in Ligue 1.
There are six English clubs in the last 16 — the highest number ever at this stage — though none will face each other in this round.
However, two all-English quarter-final ties are still possible.
Liverpool will meet Galatasaray in a rematch from the league phase, where the Turkish club won 1-0 at Anfield in September.
The winner of that tie will face either PSG or Chelsea in the quarter-finals.
Newcastle United have been drawn against Barcelona, with the first leg at St James’ Park. Barcelona won 2-1 there earlier this season.
Barcelona coach Hansi Flick said his team respects Newcastle and is focused on reaching the final.
Tottenham Hotspur will play Atletico Madrid, and the winner of that tie will meet either Newcastle or Barcelona in the next round.
Arsenal, who topped the league phase, will face Bayer Leverkusen.
If they progress, they are expected to meet either Bodo/Glimt or Sporting CP in the quarter-finals. Bodo/Glimt reached this stage after eliminating last season’s runners-up Inter Milan in the play-offs.
Bayern Munich, the German champions, will take on Atalanta, the only Italian team left in the tournament.
The first-leg matches are scheduled for March 10 and 11, with the return legs set for the following week.
Clubs that finished in the top eight during the league phase will host the second legs.
This season’s Champions League final will be played at the Puskás Aréna in Budapest on May 30.
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