Silva was one of the key players in City's surge last season to a first English title since 1968, after signing from Valencia in July 2010.
The 26-year-old Silva said Monday that "the team is growing and we are now aiming at the Champions League and so that also is another reason to want to stay here and try and win it."
"I'm very happy these past two years. We've won titles and we want to win more," Silva said. "I'm happy with the project."
Silva scored the opening goal in Spain's 4-0 win over Italy in the final of this year's European Championship. He also has a World Cup winner's medal from 2010.
City plays Real Madrid at Santiago Bernabeu stadium in the group stage of the Champions League on Tuesday.