The Argentina international has scored 75 goals in 122 appearances for City following his arrival from Atletico Madrid in 2011 and has won two Premier League titles and the Capital One Cup during his time in England.
Aguero becomes the third player in the last 48 hours to sign a new five-year deal with City after David Silva and Vincent Kompany both extended their contracts.
“The reality seems to be that ever since I came here, during every close season, there have always been rumours suggesting that I might be returning to Spain," Aguero told the club's official website.
“There has always been this speculation but I certainly never pay much attention to it.
“People hear this stuff flying around and they take it seriously but I can tell the fans and everyone at City to relax, I’m going to be here until I see out my contract.
“Each year, I aim to better the previous one. Last season was incredible but I’m not just satisfied with two Premier League titles, I want more and I can achieve them here alongside my teammates.
“This club is special; the fans, the stadium, the staff, the atmosphere, the new facility we’re moving into – everything!
“We have enjoyed lots of success and some incredible moments but the overall vision for the future and where we are going are the reasons why I wanted to stay here, to win trophies and to keep making history through my best years.”