The 21-year-old has agreed a five-year deal with Los Blancos, ending months of speculation linking the Spain Under-21 international with Madrid and Manchester City.
The nine-time European champions, who appointed Carlo Ancelotti as José Mourinho’s successor on Wednesday, are reported to have paid €28m (£23.8m) for the playmaker.
A statement on Madrid’s website read: “Real Madrid and Málaga have reached an agreement for the transfer of Francisco Roman Alarcon Isco, who will be tied to the club for the next five seasons.”
Isco rose to prominence under the guidance of City manager Manuel Pellegrini at Málaga, scoring nine goals and making one assist in 37 La Liga appearances last season.
The midfielder helped Spain win the European Under-21 championship in Israel earlier this month, and Isco had initiated at the time that he wanted to join Madrid.
“Madrid excites me,” Isco told AS after he was reported to have agreed a five-year deal with Real.
“They are one of the best teams in the world.”
Madrid’s Isco signing could be welcome news for Tottenham Hotspur after Los Blancos’ interest in Spurs talisman Gareth Bale.
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