Former Internazionale boss Mancini, 47, led City to their first Premier League title in 44 years when Sergio Aguero's last-gasp goal saw them beat Queens Park Rangers 3-2 in the final game of the season, putting the club ahead of rivals Manchester United on goal difference.
"I am delighted to be able to give all of my efforts to Manchester City for a further five years," the Italian coach said in a statement on the City website. "The opportunity which exists to build on our recent success is enormous.
"Manchester City is a fantastic football club, from the owner, chairman, board and the executive team, through to the players, staff and fans.
"I am very much looking forward to the challenges and excitement ahead."
Mancini had been linked with the vacant Russia manager's job when former RFU chairman Sergei Fursenko reportedly told journalists that he had agreed a deal to take over from Dick Advocaat.
Russia's current federation chief has since cooled those reports, saying no such deal had been agreed and that candidates would be announced on Tuesday.
Having won three Serie A titles and two Coppa Italia with Inter, Mancini joined City as a replacement for Mark Hughes in 2009, leading the club to what was then a highest Premier League finish of fifth place.
He managed third the following season, securing Champions League football for the first time, also winning the FA Cup with a 1-0 final win over Stoke City.
And, despite disappointment in both European competitions, last season's league success brought joy to Eastlands as City pipped local rivals United to a famous and thrilling league title.