The former Valencia star has tied himself down to the age of 33 at the Etihad Stadium, where he has already spent four successful seasons.
The Spaniard told the club's official website: "From the moment I joined the club 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 and now, 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."
The news comes only two years after his last five-season extension with City as Manuel Pellegrini looks to secure the future of one of his most talented players.