The 47-year old Italian, who guided City to their first Premier League title last season in 44 years, signed a five-year deal worth £7.5m-a-year.
City dampened interests from the Russian federation who were willing to sign 'Bob Manc' as their national coach for a fee worth £35 million over a six-year period, in a bid to strengthen their squad as they host the FIFA World Cup in 2018.
The former Inter Milan boss, who is currently on a pre-season training camp with City in Austria, was delighted to sign a contract extension and is looking forward to the challenges of retaining the title next season.
"I am delighted to be able to give all of my efforts to Manchester City for a further five years."
"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 may be the highest-paid in England but he still lags behind Jose Mourinho who is on a £10m-a-year contract with Spanish La Liga champions Real Madrid.
But the 47-year-old Italian has been richly rewarded for leading City to FA Cup triumph and their first Premier League title in 44 years. Mancini's earnings are more than double the £3.5m-a-year contract he agreed back in 2009.
Premier League's highest-paid managers:
Arsene Wenger (Arsenal) £7.1m
Alex Ferguson (Manchester United) £6.3m
Andre Villas Boas (Spurs) £5.3m
David Moyes (Everton) £3.5m