The 56-year-old moved to the Etihad Stadium to become Pep Guardiola's assistant in June 2020, replacing Mikel Arteta who took charge at Arsenal.
Lillo was regarded as an important member of the backroom staff by the Citizens, who lifted two Premier League titles and the League Cup during his time at the club.
Speaking to the club's official website on his departure, Lillo said: "My time at Manchester City has been one of the most enjoyable periods of my career.
"To work alongside Pep, his backroom staff and this group of players has been a pleasure and I hope to have contributed in a small way to the fantastic success we have enjoyed on the pitch.
"I wish the club the very best and hope they can achieve all of their ambitions moving forwards."
Man City director of football Txiki Begiristain added: "Juanma has been an integral part of a team that has won back-to-back Premier League titles.
"His dedication, passion and desire to improve our squad have been evident from our results on the pitch throughout his time at the club.
"It has been a pleasure working with Juanma over the last two seasons and everybody at Manchester City wishes him well in his new venture."
Lillo has enjoyed a well-travelled coaching career for over 40 years, starting out with Amaroz KE back in 1981, and he will now take the reins at 16-time Qatari top-flight winners Al-Sadd, coaching players such as Santi Cazorla and Andre Ayew.