The winger has signed a three-year contract at Ashton Gate, just six months after signing for Wolves in a £250,000 deal from Barnsley.
McIndoe, who formerly played under City boss Gary Johnson at Yeovil Town, outlined his reasons for moving.
"Firstly Bristol City have shown ambition and secondly I'm back with the manager who I've worked with before," McIndoe told the club's official website.
"After speaking to Gary it didn't take me 10 minutes to decide I wanted to come here. It should be an exciting season for everybody.
"Bristol City are an ambitious club who won promotion last year and I'm looking forward to working with the squad."
Wolves boss Mick McCarthy has explained his decision to let McIndoe join the club's Championship rivals so soon after his arrival at Molineux.
McCarthy told Wolves' website: "City expressed an interest in Michael and he likewise was interested in them
"We've signed Matt Jarvis and also have Daniel Jones fit, so I was happy to let him go.
"I'm pleased with the players we've got and the cover we have for that position. It was a good deal for the club and the player."
Sky Sports