Of the players given franchise tags by their teams so far, only Manning and Michael Vick received the "exclusive" designation, barring them from talking with other teams.
Manning will be due a salary over $23 million under the present formula. The Colts say they will continue to work on a long-term contract with Manning.
Team owner Jim Irsay announced the decision Tuesday night on Twitter.
"We have placed the franchise tag on Peyton while we continue to negotiate a long term deal," Irsay wrote.
Last year, Irsay promised to make Manning the NFL's highest-paid player. He has reiterated that position many times since then with one caveat -- if the Colts couldn't reach a new deal with Manning before free agency started they would use the franchise tag.
The Colts did the same thing in 2004 before eventually agreeing to a seven-year, $98 million deal. The Colts then pulled the tag.
Irsay hasn't backed down on either promise, and Manning, as he usually does, has remained silent about the contract.
Three weeks ago, the Colts put their first formal proposal on the table. It was an offer Irsay and team president Bill Polian wanted to make last October, but Manning informed the team then, through his agent, that he did not want to start negotiating until after the season.
The current offer is believed to be richer than the four-year, $72 million contract that New England quarterback Tom Brady signed in September. Brady's contract also included $48.5 million in guaranteed money, and Irsay has called that deal the standard.
"It's not a normal negotiation, his legacy and our relationship, it's very unusual," Irsay said last month.
On Tuesday, Indy decided not to wait any longer to make its decision.
By "tagging" Manning, no other team can negotiate with the Colts' franchise quarterback.
How critical is Manning to the Colts' success?
In 13 seasons, he has broken all the franchise's career records for quarterbacks and has never missed a start. He's taken Indy to the playoffs 11 times, captured seven AFC South titles in eight years, won two AFC championships, one Super Bowl title and a Super Bowl MVP Award.
And the Colts won more regular-season games in the past decade (115) than any team in NFL history.
The move does free up the Colts to work on other contracts before the collective bargaining agreement expires March 3.
The list of their potential free agents includes running back Joseph Addai, kicker Adam Vinatieri; Charlie Johnson, Manning's blind side protector; Melvin Bullitt, a key backup at safety who is ready to start; starting linebacker Clint Session and starting defensive tackle Dan Muir.
Irsay also has promised "significant" announcements in the coming weeks.
But, of course, none would be bigger than giving Manning the richest deal in league history in what could be his final NFL contract.
"It's important," Irsay said when asked about the importance of reaching a new deal with Manning.
"But it's something that you don't totally control, so I think you have to be prepared to work on your roster while you're doing that. That's a big part of the equation, but I think you have to be able and ready to shape your roster."
Information from The Associated Press was used in this report.