The Spain Under-21 international is Newcastle's fifth acquisition of the transfer window after their immediate return to the Premier League from the Championship.
Merino, who made just nine appearances for Dortmund last season after joining from Osasuna, will move to St. James' Park on a permanent basis once he makes an unspecified compulsory number of appearances, the Bundesliga club confirmed.
The midfielder is excited at the prospect of more regular football in 2017-2018, telling Newcastle's official website: "It feels good and I'm very happy to be here, to be part of this club.
"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 was part of the Spain team that reached the final of this year's European Under-21 Championship, where they lost 1-0 to Germany.
Newcastle manager Rafael Benitez has been impressed with the player's desire to establish himself at the highest level.
"Mikel is a midfielder with talent, an U-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."