It had been widely speculated that the 19-year-old would leave the Ligue 1 outfit during the upcoming January transfer window, with the Gunners and Roma thought to be the leading contenders for his signature.
However, following lengthy negotiations, the midfielder has decided to commit his future to the Parc des Princes until the summer of 2019.
"I am very happy, proud to sign this extension, after coming through the youth academy here. I'm also very relieved that this difficult period is behind me now," he told the club's official website. "Now I can train normally and once again be available for the selection with the coach."
Meanwhile, PSG president Nasser Al-Khelaifi added: "I always wanted this outcome and today, I'm delighted. Adrien believes in our project and we believe in his talent. He is a Parisian and the club needs these young players that come from the region."
Rabiot made 34 appearances in all competitions last season, from which he scored three goals.