The deal keeps the 31-year-old Spain midfielder with the Premier League leaders until 2020, bringing his stay at the club to 10 years.
Silva has made 234 league appearances since joining City from Valencia in 2010, scoring 40 goals for the club.
"I am so happy to have committed my future to City," he told the club's official website.
"I am incredibly proud of what I have achieved at City in my seven-and-a-half seasons here and with Pep in charge, I feel we are in a great position to win trophies this season and beyond.
"The style of football we are playing is a pleasure to be a part of and I look forward to winning more titles in the years to come."