The 28-year-old shone in Pep Guardiola's setup during his side's treble-winning 2022-23 campaign, holding his own as a full-back and centre-back for the Citizens.
Ake came up with three goals in 41 matches as Man City marched to Premier League, Champions League and FA Cup glory, and his previous contract was due to run out in 2025.
However, the Netherlands international has now penned a two-year extension with the European champions and expressed his delight at staying with "the best club in the world".
"This is the best club in the world, I have no doubts about that," Ake told the official Man City website. "Being a Manchester City player makes me incredibly proud every single day.
"It's a football club that expects excellence in every area, which makes for the perfect environment to improve. It drives me on and makes me better. I am at the stage of my career where I want to keep developing and I can definitely do that here.
"Pep is the best manager in football - a genius who has made me see the game differently - so to be able to work with him for longer is a real privilege. I am so grateful to him for everything he has done for me, both personally and professionally.
"I also want to thank the City fans for their support. I have really felt it since I came here, and it helps me so much. My focus now is on making them proud and winning more trophies."
Director of Football Txiki Begiristain added: "We have been delighted with Nathan's development, so it's great news for this football club that he is extending his time with us.
"There is no doubt he was a very important part of our Treble success last season, but I believe he can be even better.
"Technically, tactically and physically he has everything we want in a defender - and he is so professional, dedicated and willing to learn, which for Pep is an ideal scenario.
"Nathan is also an incredible human being who has the respect of absolutely everybody at the Club. I am really happy for him and his family, and I am excited to see what more he can achieve here at City in the coming years."
Ake has now amassed seven goals from 81 appearances in a Man City shirt since arriving from Bournemouth in 2020, commanding a £38.9m fee to leave the Cherries.
The former Chelsea man becomes the fourth Man City player to sign a contract extension over the past 12 months, following in the footsteps of Phil Foden, Julian Alvarez and Scott Carson.
Guardiola's side finalise their pre-season preparations against Atletico Madrid in South Korea on Sunday before taking on Arsenal in the Community Shield on August 6.