Sportsmail reported last week that the England international had verbally agreed fresh terms after an 18 months during which he has flourished under Pep Guardiola.
Sterling has seven goals already this season and Guardiola has consistently said the 23-year-old is becoming stronger and more mature.
'I'm delighted to sign - my development here has been incredible,' Sterling said. 'I felt from the minute I got here it was the right choice for me. It's really paid off for me and I'm really grateful.
'Every season you come in you want to do better than your previous season. You want to try and develop and get better.
'With the facilities we've got here there's no reason not to. With the coaching staff and the players we have in this team it's the perfect environment to develop and get better.'
There had been concerns over the winger's future as talks dragged on but he always wanted to commit to the Premier League champions.Manchester City sporting director Txiki Begiristain added: 'This is a significant moment for the club.
'Raheem has improved dramatically in the past two seasons and is now one of the Premier League's best attacking players. His statistics tell their own story.
'He's quick, strong and excellent in front of goal – everything a modern-day forward needs to excel.
'We're all delighted he has committed his future to City.'
After increasing his annual salary from £180,000-a-week, Sterling is now England's highest-earning player. But Manchester United's Alexis Sanchez remains the top earner in the Premier League, with the Chilean on £350,000-a-week at Old Trafford,