The 28-year-old goalkeeper joins John Stones and Ruben Dias in recommitting himself to City, who also tied Kevin De Bruyne and Fernandinho down to new deals earlier this year.
Ederson had four years remaining on his previous deal but City have rewarded the Brazil international for his role in last season’s Premier League title win and run to the Champions League final.
“This was an easy decision for me. There is nowhere else I’d want to be,” he said.
“To be part of one of the best squads in world football and to compete for trophies year in year out is what every footballer wants, and that is the opportunity you’re given at City.
“We have an outstanding manager. Working with him has been one of the great experiences of my career and I am a better player for it.
“We have achieved so much in the last four years, and I am confident we can continue to bring more success to the club in the coming seasons.”
As well as breaking the British transfer record with the £100m signing of Jack Grealish, City focused on renewing and extending the terms of several key players this summer.
Ederson won the Premier League’s golden glove award for the second time last term, keeping 19 clean sheets as City lifted their third title in four seasons.
Txiki Begiristain, City’s director of football, said: “Ederson is one of the best goalkeepers in the world.
“He is perfectly suited to our philosophy here at Manchester City and his ability with the ball at his feet makes him fundamental to our style of play.
“Since we signed him, he has added a new dimension to our game and has revolutionised goalkeeping in the Premier League in the process.”