City boss Manuel Pellegrini was keen to tie up a long-term deal for Dzeko who played a starring role in his side's Barclays Premier League opener at Newcastle on Sunday.
The Bosnia-Herzegovina striker joined City from Wolfsburg for £27m in January 2011 and has since scored 66 goals in 155 appearances in all competitions.
Dzeko scored the vital last-minute equaliser against QPR which paved the way for Sergio Aguero to snatch victory in the finals seconds as City ended a 44-year wait for the title in 2012.
Last campaign Dzeko netted 26 goals and was influential in helping Pellegrini’s side win their second Premier League title in three years.
In the three-and-a-half years since joining the club he has won the FA Cup, the League Cup and two Premier League titles.
“I’m really happy here at City, it’s a second home to me, so It was an easy decision to stay for the long term.
“I knew from the beginning when I started here that I wanted to stay for a long time – I can’t see any place than here.
“I’m settled perfectly to life here, I know my team-mates, the club, the team very well and I feel like can improve even more.
“Over the last three-and-a-half years we’ve made history together but I feel like we are only at the start of something really special.
“There are still so many objectives and goals that I want to reach from my career in the game and I believe that I am in the perfect place to achieve them all.
“The fans have always shown so much faith in my ability and I feel so much love, both from supporters inside Manchester and from those all over the world.
“I hope I can continue to repay this unbelievable support over the coming season and beyond.”
The 28-year-old joins Aleksandar Kolarov, Samir Nasri, David Silva, Vincent Kompay and Sergio Aguero in signing new contracts.