Chelsea had hoped to seal a deal for the full-back but have been beaten by Manchester City who should unveil the 26-year-old today.
City have agreed a £26.8m fee in a move that will infuriate Antonio Conte as he loses out on another target.
Conte has ramped up his spending and Chelsea should announce the signing of Alvaro Morata today but lost out on Romelu Lukaku to Juventus and Leonardo Bonucci to AC Milan.
And City are now set to sign the Brazil international on a five-year deal according to Spanish outlet Marca.
Danilo will become the second right-back City sign after a £54m deal for Kyle Walker was complete last week.
Danilo will compete with Walker for a spot in Pep Guardiola’s side but can also play left-back and in central midfield.
His arrival will see Manchester City’s spending reach £150m after the signings of Bernardo Silva, Ederson and Walker.
City are still hopeful of signing Benjamin Mendy from Monaco and remain keen on Alexis Sanchez despite Arsenal’s refusal to sell to a domestic rival.
City have also been linked with a move for teen sensation Kylian Mbappe but Monaco have accused them, and Real Madrid and PSG, of illegal approaches.