The Italian tactician was being heavily linked with a big money deal to take over the Russian national team but has committed himself to City until 2017, ending any speculation regarding his future.
"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," he told the club's official website.
"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."