The Spanish international's previous deal had been due to expire in the summer of 2017.
However, the 28-year-old, who joined City in 2010 from Valencia, has now committed himself to the Etihad Stadium until at least 2019.
"From the moment I joined the club four years ago it has felt like a second home to me. 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?" he told the club's official website.
"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."
Silva made 40 appearances last term, from which he scored eight goals.