The 18-year-old is moving away from the Citizens for the first time in his career, albeit on a temporary deal, and will spend the 2022-23 campaign with the Terriers.
Mbebe, who will wear the No.3 shirt at the John Smith's Stadium, becomes the third Premier League starlet to join Huddersfield on loan this summer after the arrivals of Tino Anjorin from Chelsea and Kaine Kesler-Hayden from Aston Villa.
Speaking to the club's official website on Mbete's arrival at the club, head coach Danny Schofield said: "Luke is a very exciting player who will add real balance and qualities to our first-team squad.
"As you would expect from someone who has had their football education at Manchester City, he is very comfortable in possession. He's also blessed with genuine athletic qualities - he's very fast across the ground - and he adds another left-sided option, which are very difficult to come by at this level.
"He will have to adapt to the challenges that the Sky Bet Championship throws up, for sure, but he certainly seems to have the appetite for that challenge. We're really looking forward to working with him."
Head of Football Operations Leigh Bromby added: "There was a lot of interest in securing Luke's services from several Championship clubs, so we're delighted that Manchester City have shown confidence that we are the right destination to continue his development.
"Luke has already made an impression on Manchester City's first team as a teenager, which is an incredible show of faith in his potential to play at the highest level.
"He will arrive here on the back of a good pre-season and having been involved in two of City's first four games of the new campaign, so he'll be ready to make his mark with us.
"We've got a fantastic track record of working with some of the country's top young talent and we're delighted to continue this with Luke."
Mbete, who signed a three-year contract extension at the Etihad Stadium in June, was a standout performer for City's Under-23s side who lifted the title last season.
The 6ft 1in left-sided centre-back made 20 Premier League 2 appearances last term and also featured three times for Pep Guardiola's senior team, including his professional debut in the 6-1 EFL Cup win over Wycombe Wanderers in September 2021.
Mbete, who is an England Under-19 international, sustained a head injury in City's friendly encounter against Barcelona last week, and it remains to be seen whether he will be able to make his debut for Huddersfield in Sunday's Championship clash at home against Blackpool.
Meanwhile, City have completed the signing of centre-back Manuel Akanji from Borussia Dortmund on a five-year contract for a fee believed to be worth an initial £15m plus £1.7m in add-ons.