This paper reviews current developments in mechatronic systems for metal cutting and forming machine tools. The integration of mechatronic modules to the machine tool and their interaction with manufacturing processes are presented. Sample mechatronic components for precision positioning and compensation of static, dynamic and thermal errors are presented as examples. The effect of modular integration of mechatronic system on the reconfigurability and reliability of the machine tools is discussed along with intervention strategies during machine tool operation. The performance and functionality aspects are discussed through active and passive intervention methods. A special emphasis was placed on active and passive damping of vibrations through piezo, magnetic and electro-hydraulic actuators. The modular integration of mechatronic components to the machine tool structure, electronic unit and CNC software system is presented. The paper concludes with the current research challenges required to expand the application of mechatronics in machine tools and manufacturing systems.