Liverpool, Tottenham and Aston Villa are also in the tournament, dubbed the NextGen Series, which will consist of 16 clubs in four groups. City have also been paired with Celtic and Marseille.
After England's disappointing first-round exit from the Under 21 European Championship, the competition is seen as the ideal platform to improve the quality of opposition for younger players and give them valuable experience of an elite competition.
Major players: Manchester City, who last won the FA Youth Cup in 2008, have helped pioneer the idea
Manchester United, Arsenal and Chelsea are waiting to come in next season, along with Ajax.
The inaugural line-up has been determined by invitation and recommendation, influenced by the quality of each club's academy. There is one more place to be confirmed.
NextGen is the brainchild of former Watford academy manager Mark Warburton and will pit some of the best young sides in Europe against each other home and away in a tournament that will start in August with the knockout stages in January.
Sportsmail revealed how the project was being formulated last year when Manchester City played Ajax in a friendly in Amsterdam. City are considered to be major players in the development of this tournament as they increase their profile around the world.
Cream of the crop: Manchester United are the current holders of the FA Youth Cup after victory last month over Sheffield United
All the fixtures are yet to be finalised but it is understood that Villa are in a group with Norway's Rosenborg and Fenerbahce of Turkey, and City and Barcelona will face Celtic and Marseille.
The top two teams in each group will go forward to a finals competition. TV rights are being negotiated and the finals could be staged in Abu Dhabi.
Warburton, a former professional footballer who established the Harefield Academy and helped Watford become the first English professional club to combine full-time academic learning and football, pioneered the competition to help prepare promising young players for top-level football.
He is now sporting director at League One club Brentford, and said: 'Apart from the exceptional few who jump straight to the first team, many promising young players graduating from academies were not provided with enough consistent high-quality football challenges.'
Stars of the future: Barcelona are one of the sides who will put teams through the NextGen tournament
Although the costs will be high, clubs have jumped at the idea as they look to improve the quality of players graduating from their academies and, crucially, tempt top young players from other clubs with the chance of playing in Europe.
Liverpool and Chelsea are among the clubs to have raised concerns about the level of investment in their academies and how it has failed to correlate with the end product.
Now they hope this can help bridge the gap in the development of young stars.
It is expected that the competition will grow as more heavyweight clubs rush to join in. The early European Cup, launched in 1955-56, also started as a relatively small competition and then mushroomed.
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