The Spaniard had stalled on the contract offer for nearly two months and reports claimed he could move to Real Madrid.
The Kop chief said: “My heart is with Liverpool Football Club, so I’m delighted to sign.
“I love the club, the fans and the city and with a club like this and supporters like this, I could never say no to staying.
“I always made it clear I wanted to be here for a long time. When I complete my new contract it will mean I have spent over a decade in Liverpool.”
The new deal will see Benitez earn around £85,000 a week.
