Reyna had joined Sunderland from Glasgow Rangers on a $6.8 million transfer in December of 2001 and helped the team avoid relegation from the Premier League. A knee injury ended Reyna's 2002-03 season last October and Sunderland was relegated to the First Division.
Manchester City finished ninth in the Premier League last season and has qualified for the UEFA Cup. It will face Belgium's Lokeren at home Sept. 25 and in Belgium Oct. 16.
''As we build a squad up here we have to be quite optimistic and say that hopefully we will do quite well in Europe,'' Keegan said. ''We could do well in Europe and we want to do well in the cup competitions. We want to challenge for a top four spot in the league.
''To do that we must have a good pool of players. Claudio Reyna has captained the American side, he is another international with good experience. The signing just makes sense.''
Since recovering from his knee injury, Reyna played four Gold Cup games for the United States in July.
Fulham and Everton had also expressed interest in Reyna and Fulham boss Chris Coleman said he had expected Reyna to play for the Cottagers this weekend.
Reyna has been abroad since 1994, when he joined German First Division club Bayer Leverkusen. In 1997, he moved to the Bundesliga's Wolfsburg, which sold him for $2.8 million to Rangers in 1999.