Keane's stay at the npower Championship club was due to finish after next week's home league clash with Wolves.
City boss Nigel Pearson said: "He will be here until the end of the season and we are pleased we can extend it.
"He has done well for us and he has played well. This is a good chance for him to get more league experience."
Keane initially linked up with Leicester in November along with fellow United youngster Jesse Lingard but was injured making his debut at Bolton.
The 19-year-old returned to United for treatment but, after both players' loans were extended to January 2, with Keane's deal extended further until the end of this month, he returned to City's starting line-up for the 6-1 hammering of Huddersfield on New Year's Day.
The latest extension will be officially confirmed next week.