The 33-year-old joined from Chelsea last summer and has established himself as a valued presence within the goalkeeping group, even without making a competitive appearance.
He has provided support and healthy competition for first choice Gianluigi Donnarumma and second-choice James Trafford, having arrived during a period of significant transition after Ederson and Stefan Ortega both departed.
Bettinelli was pleased to confirm his future.
"It's a great feeling knowing I'll be at Manchester City for another season. It's a real privilege to be here and I'm learning so much every day."
He outlined the role he sees himself playing.
"The staff have been superb — I have felt really supported since day one."
"My job is to be the best I can be, push our other goalkeepers and ensure that, as a group, we are improving. I think we are definitely doing that."
Director of Football Hugo Viana, who has overseen a substantial reshaping of the squad since arriving at the club, also expressed his satisfaction.
"Marcus has been a really good signing for us. He's a top goalkeeper and a brilliant person. He's brought ideas and energy to our goalkeeping department and we are delighted he is staying for longer."
"It's vital for any top club to have a thriving goalkeeping department and Marcus is a big part of ours."
A former England youth international, Bettinelli came through the Fulham academy and made over 120 appearances for the west London club before spells at Middlesbrough and four seasons at Chelsea — where, like at City, he never played a Premier League minute.
The extension takes on added significance given reported interest from Newcastle and Tottenham in Trafford heading into the summer. Whatever changes come in the goalkeeping department, Bettinelli will be there for another year.