The 18-year-old broke into the first team under Manuel Pellegrini last year and scored on his second appearance for the club, going on to play in three competitions across the course of the campaign.
However, Garcia has failed to get onto the pitch for any pre-season minutes this summer under new Citizens boss Pep Guardiola.
A statement from Alaves said: "Deportivo Alaves has secured the services of Manu Garcia, a young and promising player from Manchester City.
"The talented footballer arrives on a season-long loan and with a lot of enthusiasm to showcase his talent in the La Liga Santander."
Garcia, who arrived at City's youth academy in 2013 from Sporting Gijon, is under contract with the Premier League club until June 2017.