Spaniard Lillo, 56, joined City in June 2020 to fill the gap left by Mikel Arteta’s departure to Arsenal.
“My time at Manchester City has been one of the most enjoyable periods of my career,” Lillo told the club’s official website.
“To work alongside Pep (Guardiola), his backroom staff and this group of players has been a pleasure and I hope to have contributed in a small way to the fantastic success we have enjoyed on the pitch.”
Director of football Txiki Begiristain said: “Juanma has been an integral part of a team that has won back-to-back Premier League titles.
“His dedication, passion and desire to improve our squad have been evident from our results on the pitch throughout his time at the club.”