The 22-year-old has been pursued by the Gunners this summer after a string of impressive performances in Ligue 1, which earned him a call-up to the French national team.
Despite refusing to clarify his future, Grenier said that he always knew he wanted to stay with Les Gones and promised fans that there is more to come next season.
"It was difficult for me to relax on holiday as things hadn't been settled. I found it tough to communicate," Sky Sports News quotes him as saying.
"In my head, I knew I wanted to stay in Lyon and that it was my priority.
"This extension is good news for me personally. I've had six good months, but I'm not finished improving."
The free kick specialist made his debut for Les Bleus in their 1-0 friendly defeat to Uruguay last month.