Questions were raised over the long-term future of the 20-year-old following reports that up to 15 clubs were interested in snatching the forward from the North West outfit.
"I feel really happy of course, it's a fantastic football club and to sign a new deal is really, really good," the Swedish striker told the club's official website.
"I've been here for a long time and Manchester City are the ones who have helped me grow and develop to the player I am today, so I am very grateful for that and I've seen how the club has turned into one of the biggest clubs in the world and it is great to be a part of that.
"It's a very exciting time to be part of the club, we're the champions from last season and City are now looking to be the best in every way and to be part of that and for the club to show that they want me to be a part of that is very nice."
Guidetti, who moved to City in 2008, is believed to have attracted interest from Queens Park Rangers in the summer.