The 24-year-old Argentina international scored 12 goals in 30 league appearances last season, and netted the winning goal against Queens Park Rangers that secured them the 2011/12 title.
"I'm very happy at City and I feel very appreciated," he told the club's website recently.
"It's been barely two years since I've arrived and sometimes I feel like I've been here for all my life."
British media speculation had linked Aguero with a move to La Liga side Real Madrid, but he has become the latest City player after Gael Clichy, Yaya Toure and David Silva to extend his contract.
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