make a dropdown custom field with ‘cities’ list in it

You can register custom taxonomy like so:

<?php
// Register custom taxonomy for locations
function mamaduka_register_taxonomy_location() {
    register_taxonomy( 'location', array( 'post' ), array(
        'hierarchical' => true,
        'label' => 'Locations',
        'public' => true,
    ));
}
add_action( 'init', 'mamaduka_register_taxonomy_location' );
?>

for more information about custom taxonomy see Codex: http://codex.wordpress.org/Function_Reference/register_taxonomy