The 32-year-old spent four years at the Etihad Stadium after leaving Arsenal in a £12 million deal, but made just 13 appearances last term and was excluded from the club's Champions League squad.
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"This means a lot to me," Toure told the club's official website.
"Firstly, I'm joining one of the best clubs in England. When I left City it was important for me to stay in England because it's the best league - and to join Liverpool is massive for me.
"I chose Liverpool because of the history and because of the spirit of the team and the people here."
Toure becomes Liverpool's fourth signing of a busy transfer window so far following the arrivals of forwards Luis Alberto and Iago Aspas and goalkeeper Simon Mignolet.
The centre-back joins the club following veteran Jamie Carragher's retirement at the end of last season.