The 19-year-old striker made his Premier League debut last season, scoring 14 goals in 35 appearances for City in all competitions.
"Kelechi is a natural goalscorer. I knew about him before, but I've been really impressed with him since I arrived," City manager Pep Guardiola told the club's website. (http://bit.ly/2bgajNR)
"I like his personality, his attitude, his ability – we hope to help him reach the highest level and to realise his full potential."
Iheanacho came on as a second-half substitute in City's 2-1 win over Sunderland in their Premier League opener at the weekend.
Guardiola's team travel to Stoke City for their second league game of the season on Saturday.
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