The Brazilian, who signed for City in a reported £12m deal in 2014 from Porto, made more than 100 appearances for the club in his three seasons at the Etihad, scoring four goals.
Fernando, 30, found opportunities limited under Pep Guardiola last season though, with compatriot Fernandinho often preferred in a holding role in the City midfield.
pleasure to play for Manchester City," said Fernando. "The club has looked after me incredibly well throughout my time here and I have enjoyed the challenge of playing for a top team in probably the world's toughest league.
"The League Cup success of 2016 was a highlight for me and something I will never forget."
Manchester City director of football Txiki Begiristain added: "Fernando has been an excellent servant for City. He is a dedicated professional and a player who has made a significant contribution throughout his time here.
