The club’s surprise statement ends considerable speculation linking them with outgoing Bayern Munich boss Guardiola and over Pellegrini’s future.
Guardiola will take over from the start of the 2016-17 season having agreed a three-year contract with the club.
A statement from the club read: “Manchester City can confirm that in recent weeks it has commenced and finalised contractual negotiations with Pep Guardiola to become MCFC head coach for the 16/17 EPL season onwards.The contract is for three years.
“These negotiations were a re-commencement of discussions that were curtailed in 2012.
“Out of respect for Manuel Pellegrini and the players, the club wishes to make its decision public to remove the unnecessary burden of speculation.”
Manuel Pellegrini, who is fully supportive of the decision to make this communication, is entirely focused on achieving his targets for the season ahead and retains the respect and commitment of all involved with the leadership of the club.”
Guardiola announced in December that he would leave current club Bayern Munich in May after three years at the helm, with an intention to coach in England next season.
The 45-year-old Guardiola notched up the treble of Champions League, German Cup and Bundesliga titles in 2013, but in the last two seasons, Bayern have exited the Champions League at the semi-final stage.
The ex-Spain international previously coached Barcelona from 2008-12, leading the Catalan giants to domestic and Champions League glory in a remarkable run of success.
The much-travelled Pellegrini, 62, signed for City in 2013, becoming the first Chilean to coach in the Premier League.
During his tenure, City have won 64 of the 99 games played. The only coach to have won more in his opening 99 Premier League games is Jose Mourinho (73).
Manchester City, who sit second in the Premier League behind Leicester, remain in the running for four trophies this season.