The Court of Arbitration for Sport (Cas) announced the club were cleared of "disguising equity funds" on Monday.
Uefa's Club Financial Control Body (CFCB) issued the ban in February after ruling City had committed "serious breaches" of Financial Fair Play (FFP) regulations between 2012 and 2016.
City's original fine of 30m euros (£26.9m) has been reduced to 10m euros.
In delivering the ruling on Monday, Cas said City did "fail to cooperate with Uefa authorities" but overturned the decision by Uefa's club financial control body (CFCB) to ban them.
City said the decision was "validation of the club's position and the body of evidence that it was able to present".
Uefa statement
Uefa takes note of the decision taken by the Court of Arbitration for Sport to reduce the sanction imposed on Manchester City FC by Uefa’s independent Club Financial Control Body for alleged breaches of the Uefa Club Licensing and Financial Fair Play regulations.
Uefa notes that the Cas panel found that there was insufficient conclusive evidence to uphold all of the CFCB’s conclusions in this specific case and that many of the alleged breaches were time-barred due to the five-year time period foreseen in the Uefa regulations.
Over the last few years, Financial Fair Play has played a significant role in protecting clubs and helping them become financially sustainable and Uefa and ECA [European Club Association] remain committed to its principles.