UEFA has agreed to water down the sanctions it imposed against City and Paris St Germain for breaching financial fair play rules following pressure from the players' union FIFPro.
The governing body had intended that both clubs would only be allowed to have 21 players with eight of those having come through the youth system in their home countries.
But general secretary Gianni Infantino, in Sao Paulo for the FIFA Congress, has now confirmed the two clubs will only have to name five, a decision which could have a significant impact on the club's transfer plans.
Infantino said: "It came after a request from the players' union FIFPro saying when you take these kind of sanctions and measures you cannot harm the players and the rights of a player who has a contract for the behaviour of the clubs.
"So we looked at it and it was felt appropriate there for the number to be proportionally reduced as well."
City and PSG were fined £49m over three years, which could be reduced to a single year if financial targets are met in the following years.
The Premier League champions have already said their summer transfer plans would be unaffected by a restriction limit of their transfer spending to a net £49m.
Both clubs also have to cap their Champions League squad wage bills at their 2013/14 levels for the next two seasons.
The reduction in the homegrown players limit means City will be able to cope with the departure of Joleon Lescott, while Micah Richards and James Milner have been linked with moves.