Sterling has been negotiating with City for several months, and England's wingman has finally agreed to a new contract after he was associated with moving to Real Madrid.
The 23-year-old is now associated with City until 2023, and his reports from this month say his extended contract will be worth £ 300,000 ($ 389,000) a week, making him the best-paid player in England.
"I'm happy to sign it and my development was amazing," he told City.
"I felt that from the moment I arrived here, it was the right choice for me, which really paid off and I'm really grateful."
Sterling flourished under the management of City Pep Guardiola and became a key player in the club and country since coming from Liverpool in 2015.
He scored 23 goals in all competitions in the last season, and City won the Premier League title in record-breaking style, and also raised the League Cup.
Sterling scored seven goals in the first three months of the current season, helping City to return to the top of the Premier League.
"Every time of the year you want to do better than last season, you want to try and grow," he said.
"Thanks to the facilities we have here, there is no reason not to do so. Thanks to the coaching staff and players we have in this team, this is an ideal environment for development and improvement."
Sterling's contractual decision comes on the eve of the Sunday adversaries against Manchester United aristocrats.
City is in great shape after the start with a total of 12 goals in the last two games against Southampton and Shakhtar Donetsk.
The pound won three of these goals, winning a controversial penalty against Shakhtar, who later admitted that he should not have been awarded.
City Football Director Txiki Begiristain added: "This is an important moment for the club, Raheem has improved dramatically in the last two seasons and is now one of the best players attacking the Premier League, and his statistics tell their own story.
"He is fast, strong and excellent before the goal – everything a modern striker needs must succeed."
"We are all delighted that he entrusted his future to the City."