Tottenham were reportedly leading the chase for the playmaker, who starred as Spain won the Under-21 European Championship last month.
But it is Arsenal who have the north London bragging rights on this occasion, with Ceballos agreeing to a temporary switch from Madrid to Emirates Stadium.
Ceballos signed for Madrid from Real Betis in 2017 but failed to establish himself in his first season at Santiago Bernabeu.
Zinedine Zidane’s departure at the end of 2017-18 afforded the 22-year-old more opportunities, although he made just three LaLiga appearances following the Frenchman’s return to Los Blancos in March.
Ceballos becomes Unai Emery’s third signing of the close-season after William Saliba - who has been sent back to Saint-Etienne on loan - and young Brazilian forward Gabriel Martinelli.
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