The Italian had 12 months remaining on his existing deal, with reports linking him to the vacancy with the Russian national team following Dick Advocaat's departure.
However, the announcement of his new five-year deal at City puts paid to speculation over his future - and a platform for him to build the club towards even further glory.
"The opportunity which exists to build on our recent success is enormous," he told mcfc.co.uk.
"I am very much looking forward to the challenges and excitement ahead.
"I am delighted to be able to give all of my efforts to Manchester City for a further five years.
"Manchester City is a fantastic football club, from the owner, chairman, board and the executive team, through to the players, staff and fans."
Having joined City, owned by Sheikh Mansour bin Zayed, in December 2009, Mancini has overseen a steady progression of improvement as the club rose from a fifth-place finish at the end of his first season to third and then ultimately top spot, along with the club's victory in the 2011 FA Cup final.
The club's interim chief executive officer John MacBeath said success at the Etihad Stadium had only enhanced the manager's reputation.
"Roberto's managerial credentials have been well proven in Europe for many years," he said.
"And in leading a team which has won the FA Cup and an unforgettable Barclays Premier League title in successive seasons, his ability to manage in the English domestic game is also undisputed.
"This new agreement allows Roberto to focus on the challenge of guiding a team which is capable not only of defending the Premier League title, but one which can compete for European honours."