The 24-year-old has signed an extension until 2027, just 12 months after arriving from Benfica.
He was also named the Premier League's Player of the Year and UEFA's Defender of the Year.
"I'm very happy to sign the new deal. I have enjoyed every single minute of my time at City since joining last year," Dias said in a statement.
"Playing for City has surpassed all my expectations and it's an absolute pleasure to be part of such an incredible squad.
"I would also like to thank Pep and the coaching staff for the way they have helped me to develop as a player and keep pushing me to improve.
"To be part of the squad that achieved so much last season was incredible and made us all hungry to achieve even more.
"Now I just want to try and play my part in helping us be successful this season and beyond."