After breaching Uefa rules, City's spending in 2014 was capped at £49m and their European squad cut to 21 players.
They were also fined £16.3m but, after meeting break-even compliance targets, restrictions have been eased.
Paris St-Germain, who were given the same punishment last year, have also had sanctions lifted.
"The lifting of restrictions is subject to ongoing additional controls and audits," European football's governing body Uefa said in a statement.
"The club remains under strict monitoring and has still to meet break-even targets and is therefore subject to some limitations in 2016."
PSG president Nasser Al Khelaifi announced the French champions' intention to recruit new players after the easing of FFP regulations.
"We will look to buy the best players that the team needs," he said.
Earlier this week, Uefa eased its break-even FFP regulations in an effort to encourage investment in European club football and move from "austerity to sustainable growth".
Under FFP, clubs cannot spend more than their revenue but one of the new rules allow for clubs who want to invest but fear they could breach the break-even rule to approach Uefa and gain approval for their plan in what is known as a "voluntary settlement".
"We always said we want investors in football but good investors," Uefa general secretary Gianni Infantino said.
"Sadly in many countries all over Europe we have people who came into football, promised all sorts of things and clubs have then gone bankrupt."