City were the only English club not among the top seeds for the draw, as Roberto Mancini's side still have a relatively low UEFA co-efficient, and they will face Jose Mourinho's nine-times European champions Real, German champions Borussia Dortmund and Dutch league winners Ajax Amsterdam.
"I think it is the hardest group of them all with the champions of Spain, the Netherlands and Germany," Manchester City club ambassador Patrick Vieira said.
"But this is what the Champions League is all about. You have to play these teams and beat them if you want to win it. And we want to win it."
Chelsea, the defending European champions, also have a tough-looking task in Group E along with former winners Juventus, Shakhtar Donetsk of Ukraine and Danish newcomers FC Nordsjaelland
Manchester United and Arsenal have more straightforward groups. The Gunners are in Group B with Schalke, Olympiacos and Montpellier, while Sir Alex Ferguson's United will take on Braga, Galatasaray and CFR Cluj in Group H.
There are a couple of glamour ties in prospect for Celtic in Group G - Barcelona are in the group along with Benfica and Spartak Moscow.
Bayern Munich, who lost to Chelsea in last season's Champions League final and were runners-up to Dortmund in the Bundesliga, will face Valencia, Lille and BATE Borisov of Belarus in Group F.
The competition gets underway on September 18/19.
The draw in full:
Group A: Porto, Dynamo Kiev, Paris Saint-Germain, Dinamo Zagreb
Group B: ARSENAL, Schalke, Olympiakos, Montpellier
Group C: AC Milan, Zenit St Petersburg, Anderlecht, Malaga
Group D: Real Madrid, MANCHESTER CITY, Ajax, Borussia Dortmund
Group E: CHELSEA, Shakhtar Donetsk, Juventus, Nordsjaelland
Group F: Bayern Munich, Valencia, Lille, BATE Borisov
Group G: Barcelona, Benfica, Spartak Moscow, Celtic
Group H: MANCHESTER UNITED, Braga, Galatasaray, Cluj