Forlan began his career in Argentina and soon earned a move to Manchester United.
Having tasted success with the Red Devils, the forward then moved to La Liga and emerged as a top scorer with Spain's Villareal CF and Club Atletico de Madrid.
Forlan won the Golden Ball Award as the top player at the 2010 FIFA World Cup and set his country's record for most international appearances a year later.
He also plied his trade in Japan before most recently returning to his boyhood club Penarol in Uruguay and leading them to the Apertura title in the Uruguay first division.
Ranbir Kapoor, Owner, Mumbai City FC said, "It's really exciting to have a player of Diego's quality play for us in the upcoming season. He's one of the best in the business and I can't wait to see him on the field fighting it out for Mumbai.