The current top two in the Premier League will go head-to-head at Wembley Stadium next month after City beat Newcastle 3-1 on Wednesday (Thursday AEDT) to complete a 5-1 win on aggregate in the semi-finals.
Both City and Arsenal are still in contention for a clean sweep of trophies this season. The League Cup is the chance to lift the first piece of major silverware this term and to potentially inflict a psychological blow in the race for the title.
"We're here to win trophies and we give our best every day to reach these finals and win the silverware," City forward Omar Marmoush - who scored two goals on the night - told Sky Sports.
Arsenal currently lead the standings by six points ahead of second-placed City. Both are through to the round of 16 in the Champions League and the fourth round of the FA Cup.
The League Cup final is on March 22.
"It's a pleasure to play against Arsenal, the best team right now in Europe, maybe the world," City manager Pep Guardiola said.
"As much (as) we (can) play against them, it will make us a better, better team."
Two first-half goals from Marmoush at the Etihad effectively finished off Newcastle in a semi-final where City led 2-0 from the first leg. Tijjani Reijnders added another before the break.
Newcastle scored a consolation through substitute Anthony Elanga and prevented what looked like being a rout after the first 45 minutes.
Arsenal booked their place in the final with a 1-0 win against Chelsea on Tuesday to seal a 4-2 aggregate victory.
The final will continue the recent rivalry between the clubs, which has seen City beat Arsenal to the title in 2023 and 2024. On both occasions Arsenal had led the way before being overhauled.
Mikel Arteta's team is ahead again this season and aiming to win the title for the first time since 2004.
The League Cup would be Arteta's first major trophy since his debut season as Arsenal manager when he won the FA Cup in 2020.
He was formerly Guardiola's assistant at City, and victory in the final would see him finally beat his former colleague to a major trophy.
Guardiola, meanwhile, will get the chance to win a 16th major trophy since taking over at City in 2016 and his fifth League Cup.
City are looking to win it for the ninth time and move within one of Liverpool's record haul of 10 in the competition.
Arsenal have won the trophy twice - most recently in 1993.
This year's final will be a repeat of 2018, when Arteta was part of Guardiola's coaching team as City triumphed.
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