City were found to have approached the families of two promising young players who were registered with other clubs in a bid to lure them to Eastlands.
The Premier League club will be unable to sign academy players in the 10-18 age range who have been registered with another top-flight or Football League team in the preceding 18 months.
The second year of the ban, due to begin on June 30, 2018, will be suspended for three years, while City have also been fined £300,000.
"Following an investigation, the Premier League found evidence that the club's conduct prior to applying to register the players contravened League rules," a Premier League statement said on Friday.
"This included evidence of contact between the club and members of each Academy player's family while those Academy Players were still registered with their previous clubs."
In April, the Premier League probed three City signings, including an 11-year-old Everton midfielder and a 15-year-old from Wolves.
City will not be permitted to retain the players whose moves triggered the ban.
"In each case, the Academy player was conditionally registered with Manchester City while the Premier League's investigation was ongoing," the statement read.
"As a result of the club's breaches, the players' registrations will be terminated on a specified date, with no compensation rights retained by the club, and the club will not be permitted to re-register them as Academy players.
"In addition, Manchester City has offered to pay compensation to each player's previous club, and maintain educational provision for each player until the completion of his GCSEs."
City's punishment comes after Liverpool were also hit with a ban on signing academy players for two years for a similar breach.