The 20-year-old centre-back has made six appearances for the Foxes since arriving at King Power Stadium in November, including all five first team matches since the start of 2013.
Michael's loan had been due to expire following Thursday night's visit of Wolverhampton Wanderers to King Power Stadium in the npower Championship, but he will now be available for the remainder of the campaign to aid City's bid for promotion to the Premier League.
City manager Nigel Pearson said: "I'm really pleased that Michael will be staying with us until the end of the season.
"It's been a steep learning curve for him, but he has done exceptionally well for us."
In addition to being available for City's 18 remaining npower Championship matches, Keane will continue to be available to the Foxes in the FA Cup with Budweiser, having featured in both the Third Round win over Burton Albion and the Fourth Round draw at Huddersfield Town.