The 22-year-old’s previous deal was due to expire in 2024.
Foden has scored 52 goals in 182 games since making his debut in November 2017 after emerging as one of City’s brightest academy products.
The England international reportedly began negotiations over fresh terms more than 12 months ago, with a change in the creator’s management delaying the finalisation of his new deal.
However, the Stockport-born playmaker has now reached an agreement over his future, having emerged as a key part of Pep Guardiola’s team since his November 2017 debut.
“It’s hard to put into words how happy I am to have signed this contract. It’s a dream come true,” he told the club’s official website.
“I have been a City fan all my life. I’ve trained here for so many years and I’ve even been a ballboy. I love this club so much, so to know I am going to be a part of it until 2027 feels amazing.
“I’ve improved a lot in recent years and so much of that is down to Pep and his staff, who guide me every single day on the training field. Working with them gives me the best chance of improving even more and becoming the best player I can be.
“With the squad we have here, I feel I can keep learning and winning trophies. Those are the two most important things to me.”
Foden has won four league titles and five domestic cups with City, as well as being named the Premier League’s Young Player of the Season in each of the last two campaigns.
The 22-year-old has also started the new season in excellent form, scoring seven goals across 13 appearances in all competitions.
That includes a hat-trick in City’s recent 6-3 drubbing of rivals Manchester United, a game where Erling Haaland also secured the match ball with a trio of goals himself.