The 18-year-old right-back joins on a three-year contract, returning to Australia two years after leaving Perth Glory for the Premier League giants, and follows Chido Obi's loan to Willem II and Jack Moorhouse's move to Dundee in United's post-window business, according to the Evening Standard.
Overy progressed through Australia's youth pathways, representing the Young Socceroos at the Under-20 World Cup and the Australian Under-23 side, and has already been included in senior Socceroos squads without yet winning his first cap. He first drew attention as a 15-year-old at Perth Glory, impressing against West Ham United in a 2023 pre-season friendly.
"I've had an unbelievable experience at Manchester United and learned so much from being in that environment every day, but I feel this is the right time for me to take the next step and play senior football," Overy said.
"Sydney FC is a massive club with a history of winning trophies and developing young Australian players, so I'm really excited to be joining.
"I want to come in, work hard, compete for a place in the team and show what I can do. Being involved with the Socceroos has given me a taste of where I want to get to, and playing regularly for Sydney FC is a huge opportunity for me to keep developing and hopefully earn more opportunities with the national team.
"I can't wait to get started and pull on the Sky Blue shirt."
Sydney head coach Patrick Kisnorbo believes the teenager can make an immediate impact at the club, which reached last season's A-League grand final.
"James is an extremely exciting young Australian player who we believe has a very big future," Kisnorbo said. "He is quick, aggressive, technically very good and loves to get forward from right-back, but he also has the mentality and competitiveness you want from a young defender.
"He has spent two important years developing in an elite environment at Manchester United, and now he needs regular senior football to take the next step in his career. He has already been around the Socceroos at only 18, which demonstrates how highly regarded he is, and what a good character he is as well."
Overy is one of eleven youth players United have sold this summer as the club continues to trim its academy ranks, and he will be available immediately for Sydney FC's Australia Cup semi-final against Melbourne Victory.