Sterling, who has scored seven goals in 14 appearances this season, said he was at the best club to continue improving as a footballer, reports Efe.
"I'm delighted to sign," he said, according to a statement distributed by Manchester City on Friday night.
"My development here has been incredible. I felt from the minute I got here it was the right choice for me. It's paid off and I'm really grateful."
City's director of football, Txiki Begiristain, added: "This is a significant moment for the club. Raheem has improved dramatically in the past two seasons and is now one of the Premier League's best attacking players.
"He's quick, strong and excellent in front of goal - everything a modern-day forward needs to excel."
Having arrived from Liverpool for 49 million pounds under current manager Pep Guardiola's predecessor Manuel Pellegrini, the England international has developed into one of City's main attacking weapons.
The contract extension is a reward for the fine form he has shown since the start of City's record-breaking campaign last season, during which he scored 23 goals and assisted 17 in 46 matches in all competitions.
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