Vardy said: "I'm absolutely delighted to be fighting to achieve something special with this club, as part of this squad. I've never known a spirit like it - from the owners, to the manager and his staff, the players and the fans. I want to be part of it for a long time.
"Leicester City have shown nothing but total faith in me since the day I arrived here three-and-a-half years ago and it's impossible to measure how much that belief has helped me to improve.
"I'll forever be grateful for the investment the club has made in me and I'll spend every day working to repay it."
Since signing his last deal in 2014 Vardy has broken into the England squad, winning four caps, and is in line to be included in Roy Hodgson's Euro 2016 squad this summer.
He also set a new Premier League record when he scored in 11 straight games earlier in the season.
The 29-year-old joined from Fleetwood for £1 million in 2012, has scored 44 goals in 133 games for the club and has started all 25 of Leicester's league games this season.
Vardy failed to net against Manchester City but two goals from Robert Huth and another from Riyad Mahrez means the Foxes are five points clear of second placed Tottenham.
Claudio Ranieri added: "Jamie is a fighter. He has had an unbelievable journey to get to this point in his career and continues to play every game as if it's his last. I love his spirit, which is a quality I want in my players above all else.
"He has shown what a fantastic player he is and, more importantly, he is part of a fantastic group. I am very happy that he will stay with us for a long time."
How Leicester beat City
- Telegraph