The Football Benchmark report ranks Europe's 32 most prominent clubs based on a series of criteria including assessments of their financial statements, squad value and the size of their broadcast market.
City, who play Inter Milan in Saturday's Champions League final in Istanbul, came out on top with a valuation of 4.073 billion euros (£3.5 billion).
That figure saw them overtake Madrid, last year's European champions whose own value was just behind, at 4.006 billion euros (£3.44 billion).
The Spanish giants had come out on top in the previous four years.
City "have climbed up the ranking, gaining five positions compared to the 2022 edition, primarily thanks to the remarkable financial performance recorded in the 2021/22 financial year," said the report.
City, who were taken over by the Abu Dhabi United Group in 2008, recorded revenue for last season of £613 million, the second-highest revenue figure in English club history after Manchester United's annual revenues hit £627 million in 2019.
However, in February the club were charged by the Premier League with 115 alleged breaches of its financial rules between 2009 and 2018.
The case is unlikely to be resolved any time soon.
Manchester United, valued at 3.93 billion euros (£3.37 billion), rounded out the podium, with Liverpool and Bayern Munich just behind them.
The Old Trafford club are currently the subject of a bidding war, with Qatar's Sheikh Jassim Bin Hamad Al Thani and British billionaire Jim Ratcliffe hoping to gain control of United from the Glazer family.
The current owners are understood to value United at £6 billion.
