The Liverpool forward with the shaggy hairstyle, jinking runs and inconsistent goalscoring record, had his future settled in discussions in Spain between his representative, Simon Fuller, and Madrid officials last night.
McManaman, who will undergo a medical on Monday, is to sign a pre-contract ahead of joining the Spanish club on 1 July. The move follows an ultimatum Real gave the England player to commit himself to them rather than wait for a move to Italy. Liverpool will not receive any transfer fee because of the Bosman ruling. McManaman is out of contract at Anfield on the last day of June.
"I am extremely sad to be leaving Liverpool," said McManaman, whose contract is for five years with an annual package worth pounds 2.6m a year, or pounds 50,000 a week. "It was such a tough decision because I have been here 12 years, but I have always stated that I wanted to play in Europe at some stage.
"At 27, now is the right time. Real Madrid are the European and world champions and this is a chance to test myself in a top European league.
"It was a difficult decision but in the end I thought it was something I had to do."
Jan Molby, the former Liverpool midfielder, expects no backlash from Liverpool fans. "They will respect his decision," he said. "If they had been in the same situation, they might have been looking at the same opportunities as well."
The Bootle-born McManaman landed his jackpot salary with Real only two days after another former Anfield trainee, Robbie Fowler, agreed a new five-year contract with the club. Jason McAteer, however, decided on Thursday that his future lay with Blackburn and duly moved for pounds 4m.
McManaman, capped at youth, Under-21 and 22 times at full level by England, joined his home town club from school and signed professional forms in 1990 after Liverpool's last championship success.
He made his debut against Sheffield United in December of that year but since then has only won the FA Cup in 1992 and the League Cup three years later. He scored both goals in the 2-1 win over Bolton Wanderers at Wembley in 1995.
McManaman played a leading role as England reached the semi-finals of Euro 96, but after fighting back from injury problems made only one appearance as a substitute during the World Cup finals in France last year.
Injury has blighted his progress since then, and with Liverpool again struggling in the title race, McManaman has finally confirmed the speculation linking him with a move to Spain which began last October.
McManaman's capture is a major coup for Real, with Barcelona and Juventus also in the hunt. Lorenzo Sanz, Real's president, has been frustrated by his team's performances this season. They are sixth in the Spanish championship, three points behind the leaders Barcelona, and lost 4-0 at Deportivo La Coruna last Sunday.