The Portuguese defender has signed a two-year contract extension until 2027.
Cancelo has hit new heights as a right-back, largely thanks to City’s dominance and the emergence of what it means to be a modern full-back.
His attacking display has been critical for the way manager Pep Guardiola likes to play.
“Manchester City is a fantastic club, so I am incredibly happy to have signed this new agreement,” he told the club website.
“City players have everything they need to reach their full potential, with amazing facilities, world-class teammates and an incredible manager who pushes us every single day.
“There is nowhere better to play football and it’s a pleasure to work here.”
He added: “I have so much I want to achieve before my career ends, and Manchester City offers me the best chance of fulfilling my ambitions. This new contract means now I have complete focus on improving my game and winning more trophies with this team.”
Cancelo could be in action when Man City take on Fulham in the FA Cup fourth round on February 5.