The 27-year-old has signed a five-year deal to become the Blues’ first recruit since they won the Premier League.
Mahrez was named the PFA Players’ Player of the Year during Leicester’s surprise Premier League triumph in 2015-16, and leaves the club having scored 48 goals in 179 appearances.
He stayed at the King Power Stadium – scoring 12 league goals in 36 games as the Foxes finished ninth in the Premier League – and admitted he had “regrets” over a dispute with the club which saw Professional Footballers’ Association offer to mediate.
Manchester City were thought to have offered £50m at the time, but the final fee exceeds the £57m they paid Atletico Madrid for defender Aymeric Laporte in January.
The deal represents a profit in excess of £59m for Leicester, who signed Mahrez from Le Havre for £400,000 in 2014.