The Argentine's previous deal was due to expire at the end of the season, but it had been suggested that his decision to commit would depend on the club's transfer activity this summer.
However, having guided Atletico to second position in La Liga in addition to a spot in the final of the Copa del Rey, he has signed a new long-term deal.
"Atletico Madrid and Diego Simeone have agreed to renew the coach's contract for the next four seasons," read a statement on the club's official website.
"The coach, who played as a player in the Rojiblancos in two separate periods [1994-97 and 2003-05] including the historic double-winning time in 1996, returned to Atletico in late December 2011 to take over the first team.
"Simeone won two European titles in his first year as Atletico coach - the Europa League and the Uefa Super Cup - and this season has qualified the team for the final of the Copa del Rey."
Simeone had previously been linked with the managerial post at Chelsea.