The semi-final tie is delicately poised at 1-1 after the first leg in Madrid last week as City seek revenge for defeat at the same stage of the competition last season to Ancelotti's men.
"Madrid and City are in this moment the best teams in Europe and for sure it will be an exciting game, like it was in the first leg," said Ancelotti at his pre-match press conference on Tuesday.
City are unbeaten in 22 games as they close in on a potential treble of Premier League, Champions League and FA Cup.
But the English champions are yet to turn their domestic dominance under Pep Guardiola onto the European stage as City still await their first Champions League crown.
By contrast, Madrid's squad is filled with Champions League winners as the 14-times champions have conquered Europe five times in the last nine seasons.
"We have played a lot of these games - semi-finals, finals," said Madrid midfielder Luka Modric. "We have confidence and calmness because we believe in our character and our qualities and that's what I see day in, day out."
Ancelotti has a fully-fit squad to choose from after Eduardo Camavinga recovered from the injury that forced him off against Getafe on Saturday.
And the Italian clarified comments he made at the weekend that seemed to suggest Antonio Rudiger will definitely start after he kept City's 52-goal striker Erling Haaland quiet in the first leg.
Rudiger has tended to play reserve to Eder Militao and David Alaba at centre-back this season, but started last week's clash with Militao suspended.
The Brazilian is now back and Ancelotti refused to confirm who would start at the heart of his defence.
