With his current deal expiring at the end of this past season, the midfielder will now remain at the Etihad until 2018.
The Ivorian, who will enter his eight season at the club, was faced with exile during the first few months of the season, as an argument between his agent and manager Pep Guardiola saw him frozen out of the first team.
However, the 34-year old regained his spot in November and went on to score 7 goals in 31 appearances.
"I'm delighted," Toure told the club's website. "I told myself the journey at City is not done and when I received a call from [director of football] Txiki Begiristain and talked to the manager I was very delighted.
"When I was first coming here I was trying to be part of a new story, of something special at this club.
"I am very lucky now to be part of a great club with great players around me who are helping me to achieve my targets."
"He is one of our most experienced and popular players and we couldn't be happier that he is staying with us as we embark on what we all hope will be a very exciting season.