The 22-year-old has been with the Citizens since the age of nine, emerging from the club's academy and developing into one of the brightest prospects in world football.
Foden has already made 182 senior appearances for City across all competitions, scoring 52 goals and providing 36 assists.
The Stockport-born attacker has also won a total of 11 trophies at the club, lifting four Premier League titles, four League Cups, one FA Cup and two Community Shields.
Foden's rapid rise under Pep Guardiola has not gone unnoticed, as he was named the PFA Young Player of the Year and the Premier League Young Player of the Season in each of the last two seasons.
The England international was due to see his original deal expire in less than two years' time, but the attacker has decided to commit his future to the club until June 2027.
Speaking to the club's official website about his new contract, Foden said: "It's hard to put into words how happy I am to have signed this contract. It's a dream come true.
"I have been a City fan all my life. I've trained here for so many years and I've even been a ballboy. I love this club so much, so to know I am going to be a part of it until 2027 feels amazing.
"I've improved a lot in recent years and so much of that is down to Pep and his staff, who guide me every single day on the training field. Working with them gives me the best chance of improving even more and becoming the best player I can be.
"With the squad we have here, I feel I can keep learning and winning trophies. Those are the two most important things to me.
"I want to thank every single person at City because without them I would not be where I am today. All the academy coaches I worked with, all the players I've played with and everyone who works behind the scenes. It's an honour to be part of this football club."
Director of football Txiki Begiristain added: "We are all so proud of Phil and what he has achieved already - but we know there is so much more to come.
"His natural talent and ability are obvious, but his hard work, professionalism and dedication make him really special. He loves football more than anything and his desire to improve is really incredible.
"We feel he can progress further and become even better than he is today. By signing this contract, he now has stability and can focus absolutely everything on becoming one of the best players in the world, which we feel he can be."
Foden, who has recorded seven goals and three assists in 13 games so far this season, becomes the fifth Man City player to extend his contract with the club since the turn of the year after Riyad Mahrez, Rodri, Joao Cancelo and Scott Carson.
The Citizens could now turn their attention to captain Ilkay Gundogan, who has recently been linked with Juventus and will see his current deal expire in the summer of 2023.