The English outfit announced this week that the 22-year-old Norway Under-21 international, who recently voiced his frustration at a lack of first-team opportunities at the Etihad Stadium, had been released from his contract.
He has now joined the Greek side on a three-and-a-half-year deal and has been loaned out to Ergotelis Crete until the end of the season.
"Olympiakos announces the acquisition of Abdisalam Ibrahim for the next three-and-a-half years," said a statement on the Greek club's official website.
Ibrahim joined City in 2007 but made just three first-team appearances, all in 2010.
He spent most of last year on loan with Stromsgodset, with whom he won the Norwegian Tippeligaen title.