Newcastle brought Merino in for a medical earlier this week and have finally confirmed the deal.
"It feels good and I'm very happy to be here, to be part of this club," Merino said.
"I'm looking forward to touching the ball, meeting my new team-mates and starting to play football.
"I know it's a great club and a really nice city. I had different options but I think this is the right place for me to play."
Merino, 21, only joined Dortmund last year from hometown club Osasuna.
Toon manager Rafa Benitez added: "Mikel is a midfielder with talent, an under-21 international for Spain. He's a good size, has quality on the ball and he's very, very focused and professional.
"Hopefully he's the kind of player we can improve a lot - he certainly has the mentality to get better and better.
“He comes from a top side in Dortmund and although he did not play too much last season, he was signed as a young, talented player and to be signed by a club like that shows that he has something good.
"He has to show what he has, and hopefully he can enjoy playing here for a long time."
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