The French superstar was out of contract in the summer and while all the signs pointed towards a blockbuster Real Madrid move, the World Cup winner ultimately decided to stay in Paris.
The news will come as a major blow for the La Liga champions, who reportedly agreed a financial package with the French international some time ago.
Los Blancos have been targeting the forward for a long time and even submitted a £154million bid during last summer's transfer window.
A report earlier this week suggested that PSG, who were desperate to keep their star man, offered Mbappe a deal worth £4million per month and control of the club's sporting project.
The player joined PSG in 2017 from Monaco after the Parisians forked out £130million for his signature.
Since then, the player has gone on to score 168 goals in just 216 appearances. He has also won four league titles with the club.
After the announcement of his new deal, Mbappe told the club's website: "I am convinced that here I can continue to grow within a club which gives itself all the means to perform at the highest level. I am also very happy to be able to continue to evolve in France, the country where I was born, grew up and flourished.
"I would like to thank the President, Nasser Al-Khelaïfi, for his confidence, his understanding and his patience.
"I also have a thought for all the supporters of Paris Saint-Germain, in France and around the world, for their countless expressions of affection, especially in recent months."
PSG's chairman, Nasser Al-Khelaifi, added: "The extension of Kylian's contract marks an exceptional moment in the history of our Club and is great news for all our fans around the world.
"Since Kylian joined our family, despite his young age, he has accomplished wonders at all levels. By extending with Paris Saint-Germain, he becomes the cornerstone of the club's project for the years to come, on and off the pitch."