Clubs interested in the 24-year-old striker had until midnight on Monday to meet a 40million euro release clause in his contract.
The German club, coached by former England boss Steve McClaren, confirmed on Tuesday that no club had met that condition.
City were believed to be after the Bosnia and Herzegovina international who was the Bundesliga's top scorer last season.
"The deadline within which a transfer of Edin Dzeko would have been possible this year has now elapsed. We are very happy that this period of uncertainty is over," said the club's general manager Dieter Hoeness on Wolfsburg's official website.
"Edin staying with us is the most important personnel issue of this summer.
"He is a player of exceptional quality, who wouldn't have been easy for us to replace. We have now some planning security for the coming campaign and we can work solidly on the rest of the squad details for the new season."
News that Dzeko will be at the club next term will be a major boost to new boss McClaren who has been tasked with re-establishing the former champions as a force in German football.
Wolfsburg, who won the title in 2008/09, could only finish eighth last term.
Dzeko is under contract with the Wolves until 2013.