The Brazilian goalkeeper has added a further five years to the deal penned when arriving from Benfica in last summer's transfer window.
Ederson has played a key part in the Citizens' record-breaking Premier League title success, keeping 16 clean sheets in his 36 outings.
After being rewarded with improved terms, the 24-year-old set his sights on more silverware in the coming years.
"I'm delighted to sign my new contract," he told the club's official website. "It means that the club is happy with my work, they trust me, and I hope to meet their expectations on the pitch and bring a lot of joy to the fans.
"I want to win everything we can! All of the competitions, but for me the Champions League is without a doubt a very special competition for us, and it is my dream to win it in Manchester City's shirt."
Director of football Txiki Begiristain added: "Ederson has shown in his first season at the Club that he has all the attributes needed to become one of the best goalkeepers in the world.
"He has outstanding quality and his ability with the ball sets him apart from his competitors. We are really looking forward to seeing him develop at City over the coming years."
Ederson, famed for his passing ability, has kept the opposition out 21 times in all competitions in his maiden campaign in English football.