The 34-year-old midfielder, whose current deal expired at the end of the 2016/17 campaign, has extended his stay by 12 months.
"I'm delighted," he told mancity.com. "I want to enjoy it at this age still and remaining here is a massive, massive thing. It is a great club, going in the right direction with new players who are coming in."
Toure joined City from Barcelona in 2010 and has scored 62 league goals in 220 appearances, winning the Premier League title twice, in 2011/12 and 2013/14.
"Yaya has been central to the successes we've had over the past seven years and he has a vital part to play next season," added City's director of football Txiki Begiristain.