The Serbian centre-back has been Sydney's most consistent performing this season, playing every minute of every game so far in 2013/14.
The 27-year-old originally joined the Sky Blues for just the one season but will now remain in the Harbour City until at least the end of the 2015/16 campaign.
"I'm very happy here at Sydney FC and the club matches the ambitious targets I am setting for myself," Petkovic said on Monday.
"This is the right option for me, it's now our target to win the grand final and play regularly in the Asian Champions League.
"The club is in a stable position and has excellent backing, while the support of the members is another big factor in my decision.
"Sydney FC is recognised as a big club in Australia and I'm very proud to be staying for another two years."
Sydney coach Frank Farina was delighted to have secured the former Serbian youth international and believes he can play a major part in his rebuild of the Sky Blues.
"Nikola has made the transition to the A-League very well and has performed consistently so far this season," Farina said.
"He has fitted into our style without any problems and is comfortable playing an attacking, possession based game.
"He has shown courage in his performances and shares the club's ambitions. I'm sure he will become an even bigger asset in the years ahead."
Sydney, who are currently in fifth spot on the A-League ladder, host sixth-placed Adelaide at Allianz Stadium on Saturday night in a vital clash for both side's top six hopes.
