The striker has just one year remaining on his current deal and has accepted an extension, that will run until 2018, which does not increase his €189,000-a-week wage
It emerged in April that the Premier League champions planned to open negotiations after the striker impressed Manuel Pellegrini following injuries to Sergio Aguero and Alvaro Negredo.
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Dzeko had initially appeared to be on his way out of the club while Roberto Mancini was in charge after starting just 16 Premier League games during the 2012-13 campaign.
The likes of Inter had made him their No.1 transfer target while Borussia Dortmund were assessing his availability before signing Ciro Immobile in June.
However, Dzeko thrived with increased responsibility under Pellegrini, starting 23 leagues games - seven more than the 16 afforded to him by Roberto Mancini the previous term - and notching 26 goals in all competitions.
"I can only say that I am very happy at City and at the moment we are talking about the new contract," Dzeko said earlier this week. "We will see what happens but the main thing is that I'm happy at City.
"We talked about that at the beginning of last season - it's very important you feel the confidence that a manager has in you and last season was proof of everything I said."
Dzeko will become the third first-team player to be offered new terms during the summer, with Alexsandar Kolarov and Samir Nasri penning extensions in June and July respectively.