The central defender has been one of City's most consistnet performers this season while taking his total number of City appearances to 151 since moving from Everton for £3m in October 2000.
"He has performed exceptionally well this year and is one of our top three. There is no doubt about that," manager Stuart Pearce told the official City website.
"Arguably he has done as well as anyone this season and there is merit in the school of thought that he could be the most improved player in the Premiership. I think he has matured as a man and as a player over the past year.
"The bottom line, too, is that I don't think that what we have seen from Richard Dunne this season is the finished and final article," he added.
"I think that there is still more to come from him and he can still improve a lot. He has all the credentials that a modern day player needs in his position.
"He is quick, he is aggressive, he reads the game well, he can head a ball and he is not bad with it at his feet either."