The 26-year-old has penned a new deal that will keep him at the Etihad Stadium until 2025.
"This is a fantastic moment for me," Steffen said in a statement. "I am so happy to be committing my future to Manchester City.
"In my opinion, this is the best team in world football, with the best manager and best coaching setup. It's a privilege to be here and contribute to this team achieving its targets.
"I feel I learn every day and I have definitely improved as a goalkeeper since coming here. I contributed to our success last season, which was an amazing experience.
"I want to keep pushing Ederson every single day and take my chances when they arrive."
Steffen, capped 24 times by the USMNT, has made 16 senior appearances for City since arriving to become Ederson's understudy in 2020.
He helped Pep Guardiola's side lift the Premier League title and Carabao Cup last season and was on the bench for the Champions League final against Chelsea.
"Zack is an excellent goalkeeper and a brilliant professional who brings so much to Pep's squad," City director of football Txiki Begiristain said.
"He fits the blueprint of what a Manchester City goalkeeper should be. Not only is great with his hands, but he is also calm on the ball and provides outstanding distribution, which is a vital part of our style.
"This is a man who trains to an exceptionally high standard every single day. He always wants to learn and improve.
"Our coaching staff love having him here and we want to see him continue his development over the next years."