The move will cost Milan around £20million and Mancini is aware of the adverse affect it could have on his side's chances of retaining the title.
City were yesterday held to a 0-0 draw by bottom-of-the-table QPR, meaning leaders Manchester United could go seven points clear with a win against Southampton tonight.
"It is difficult because I lost one important striker and that could be important in the next 14 games," Mancini said.
"But it is important for Mario -- to be back in Italy, back with his family and to play for Milan.
"Milan started to talk to Manchester City in the last two days and they are very close. This is for Mario because we love Mario and he deserves to have this chance."
The move was set to end a remarkable stay at the Etihad Stadium, which saw almost as many headlines for off-field incidents as success on it.
Through most of the controversy, Mancini has stood by a player to whom he has paid special attention since they were together at Inter Milan.
Asked if Balotelli had become too hard to manage, Mancini said: "No, no, no, not for me. For me, Mario was like another of my children.
"Mario is this but you can be upset with him sometimes.
"The club told me they had this from Milan. I spoke with Mario and I think he wanted this.
"I think for him after three years in England to come back to Italy will be good for him."
Mancini believes Balotelli did "very well" in his time with City, but conceded this season had proved more difficult.
That said, he believes he can become one of the best players in the world. "We are also so sad because Mario was an important player for us," Mancini added. "I hope he can continue to improve because he can become one of the world's best players."