The Serbia international, who moved to City from Fiorentina in 2012, has fallen out of favour with the Premier League champions and links up with Roberto Di Matteo at the Veltins Arena.
Nastasic is under contract at City until 2017, but the 21-year-old's loan - which is subject to the completion of a medical - includes a purchase option.
"The Royal Blues have now agreed with Manchester City over the final details of a loan for Matija Nastasic," read a statement on Schalke's website.
"Subject to the still to be completed medical checks, the 21-year-old Serbian international agrees a contract until 30th June 2015."
Nastasic has not played in a competitive fixture for City since the Community Shield defeat to Arsenal in August.
The centre-back has made 34 Premier League appearances for City, helping Pellegrini's side to a second Premier League title in three seasons last term.
However, the arrivals of Martin Demichelis and Eliaquim Mangala have seen him drift out of the first-team picture this season, and he will join a Schalke side who are fifth in the Bundesliga.
‘The pure simplicity of the way Slot has managed the squad is probably the biggest thing I could say about him. It’s not broken, so let’s get on with it’: Liverpool legend full of admiration for Jurgen Klopp's successor at Anfield
‘I trained at Spurs and thought they’d give me a chance. But I received a letter thanking me but saying they didn’t think I was good enough – I was gutted’: How Tottenham missed out on signing Wales legend John Toshack
