Spain playmaker Silva, who has won two Premier League titles with City, is now set to stay with the north-west side until the end of the 2018/19 season.
Silva, 28, has been a central figure at Eastlands since joining the club from Spanish side Valencia in 2010.
“From the moment I joined the club four years ago it has felt like a second home to me,” Silva, who has also won the FA Cup and League Cup with City, told the club’s website on Tuesday.
“On and off the pitch, I feel incredibly content and fulfilled professionally and personally, so why wouldn’t I want to stay and keep winning trophies with this fantastic team?
“Over the last four years, we have achieved so much together, establishing City as a dominating force in England and now, when I look around this dressing room, I can see no reason why we won’t become one of the top teams in the world.
“It was a straightforward decision to extend my stay here and spend my peak years at Manchester City, a club with unbelievable fans who have always supported me.”
The news will come as a boost to City following their 3-0 defeat by FA Cup-holders Arsenal in the Community Shield at Wembley last Sunday, where Silva came on as a second-half substitute.
City begin the defence of their Premier League title away to Newcastle this coming Sunday.