The new contract means that Clarke, whose original City deal was due to expire at the end of the season, will now remain at the Coral Windows Stadium until the end of June 2018.
News of Clarke's fresh contract comes shortly after the Irishman joined Josh Morris in making a welcome return to full training following a spell on the sidelines.
Clarke had been out for nearly three months after injuring his knee in the first home game of the season but he is now in contention for a return to action at Millwall on Saturday.
Speaking to Bantams Player HD after putting pen to paper, Clarke - pictured with Chief Operating Officer James Mason - explained that remaining at City was never in doubt as far as he was concerned.
He said: "This new deal has been in the pipeline for a while now but there was no real rush with my injury.
"I've loved every minute of my time at the club so far. There was never any thought of me wanting to move to somewhere else.
"My family are settled here - they love it here really - and the support I get from the fans is fantastic.
"It is great that this deal has coincided with me coming back from my injury. I am delighted to be back out on the training pitch.
"It has been a tough ten weeks for me in the gym but I'm raring to go now and I can't wait to be involved again when I'm selected.
"I want to come back in and help carry on the momentum that we've built up in recent games."