The 29-year-old Argentine has established himself as a regular starter for manager Pep Guardiola this campaign, missing only one top-flight fixture thus far, and earned his first Etihad Player of the Month award in December.
Otamendi signed for City from Spanish side Valencia in August 2015 and has since made 120 appearances for the club across all competitions, also scoring seven goals and providing three assists.
In a statement on City's official website, the defender said: "I've enjoyed my time at City since the first day I arrived and I'm really happy to have extended my stay here by a couple more years.
"My only aim is to help the team and give all I can for this Club. I am learning every day under Pep and enjoying my football and I feel I can still improve as a player.
"I'm a family man who enjoys being at home and I love living in Manchester, you sort of get hooked by it. It's a very beautiful city and I'm very happy here."
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