The signing came as Seaman announced his retirement after a series of injuries since signing for City last summer.
Kevin Keegan was on the look-out for goalkeeping cover before Seaman's departure, which makes the James signing even more important.
James stepped into Seaman's shoes for England and now he will do the same at City but there are no hard feelings - Seaman even recommended James to the City boss.
"After deciding to retire it was a pleasure to recommend David James - so I know the position is in safe hands," said Seaman.
Keegan then said: "It says a lot about the man that he has been incredibly helpful to us as a club in finding a successor at such a testing personal time for him.
"His record is incredible and his achievements unbelievable but most importantly I will remember him as an ultimate professional who cared about others."
Of his new signing, Keegan added: "David James is a tremendous acquisition. We have been looking to strengthen the goalkeeping position and to secure the England number one is terrific news."
Seaman explained that he had little choice but to cut short his one-year-deal at the City of Manchester Stadium.
"I have reached this difficult decision after much discussion with my family and those in the game whose views I respect.
"It has become clear to me that this type of injury will not quickly disappear - and I think now would be a good time to hang up my boots, rather than at the end of the season as planned."
"I believe I have had a fantastic career playing at the highest level.
"I would like to take this opportunity to thank all those people who have stood by me and supported my career, especially during the tough times, the players who I will miss for their professionalism and friendship and the fans who have inspired my enthusiasm for the game."