Diaz joined Manchester City’s academy from Malaga in 2015 and is hopeful that he can eventually force his way into the first team.
The 17-year-old caught the eye of manager Pep Guardiola when he made his senior debut in last week’s EFL Cup third-round victory over Swansea City.
“I couldn’t be happier signing my first professional contract with City,” Diaz told the club’s official website. “I only found out last week and it was amazing for me. This is one of the biggest clubs in the world and I’m really happy at City and my family is very happy in Manchester.
“It’s a dream for me and a big moment. I want to keep that dream going and hopefully I will get more opportunities to train with the first team.
“I was calm [when making my debut] because I was doing what I love the best, but it was amazing to get my chance, play with the players we have here and have Pep Guardiola as the coach. Pep has told me to keep working hard and my time will come which is obviously great for me to hear.”
Diaz follows fellow youngsters Angelino , Tosin Adarabioyo, Aleix Garcia, Angus Gunn and Pablo Maffeo in making senior appearances.