The 28-year-old striker, who signed for City from VfL Wolfsburg in 2011, penned the new deal to keep him at the club until 2018.
"I knew from the beginning when I started here that I wanted to stay for a long time - I can't see any place better than here," Dzeko told the club's website (www.mcfc.co.uk).
"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."
Dzeko joins team mates Aleksandar Kolarov, Samir Nasri, David Silva, Vincent Kompany and Sergio Aguero in penning a new long-term deal as the club looks to secure the futures of their most valuable players during the summer transfer window.
The Bosnian has scored 66 goals in 155 appearances in all competitions for City and was part of the squad that won two league titles, the FA Cup in 2011 and the League Cup this year.