The 54-year-old coach replaces Mikel Arteta on Guardiola’s backroom staff after his appointment as Arsenal manager earlier this year.
Lillo, who took Qingdao Huanghai to Chinese Super League promotion last year, managed Guardiola during his brief late-career stint at Mexican club Dorados.
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“I am delighted to have joined Manchester City’s coaching staff,” Lillo said.
“My relationship with Pep goes back many years and I am thrilled to be joining him as part of this exciting team.
“Manchester City has enjoyed much success over recent seasons and played a brand of beautiful football we have come to expect from this club and its manager.
“It’s a pleasure to become a part of this group and I hope to make an important contribution to the club’s success going forwards.”
Director of Football Txiki Begiristain added: “We are delighted to welcome Juanma to Manchester City.
“His vast experience working across three continents and with some of the most famous names in world football will be an invaluable asset to Pep and his team.
“We look forward to him playing a vital role as we return to football.”