The 19-year-old defender, who came through Anderlecht's youth set-up, was a part of City's pre-season squad that travelled to Scotland last month.
The Belgian could go straight into Celtic's squad for the Champions League play-off first-leg tie with Maribor, although their participation depends on Legia Warsaw's appeal against being expelled from the competition for featuring an ineligible player.
"Celtic have today completed the signing of highly-rated Belgian defender Jason Denayer on a year-long loan from Manchester City," read a statement on Celtic's official website.
"Jason is an exciting and talented young player, who was part of the Manchester City squad during their pre-season preparations."
It marks the second signing in as many days for Celtic, after Bulgaria international Aleksandar Tonev joined on a season-long loan from Aston Villa.