Dunney was a £3m signing from Everton in October and has been City's Player of the Year for the last 2 seasons.
Dunne signs new deal
"I'm delighted the club has shown their faith in me," he told the City's official website.
"I'm very settled here and I believe the club is going in the right direction. I think we've got a great nucleus of a squad to progress next season and I'm really looking forward to the new campaign already.
"I've had terrific support in the last couple of years - particularly from the fans," added the 26-year-old.
Meanwhile, Danny Mills has been told by Stuart Pearce he can leave the club, despite having 3 years left on his contract.
"I'm disappointed and very surprised,'' the 29-year-old right-back told The Sun.
Meanwhile, Danny Mills has been told by Stuart Pearce he can leave the club, despite having 3 years left on his contract.
"I'm disappointed and very surprised,'' the 29-year-old right-back told The Sun.