The 28-year-old playmaker joined the club from Valencia four years ago and will remain at the Etihad Stadium until 2019.
Since moving to England, the Spaniard has won two Premier League titles and an FA Cup winners’ medal.
Silva was also a member of the all-conquering Spain squad which won the European Championship in 2008 and 2012, and the World Cup of 2010.
Silva told the club's website: "From the moment I joined 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?
"Over the last four years, we have achieved so much together, establishing City as a dominating force in England.
“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."
Watch Silva in action for Manchester City when they travel to face Newcastle live on Sky Sports 1HD in the Premier League on Super Sunday, with coverage underway from 3.30pm.