Ahead of their first campaign back in the Premier League, Newcastle revealed that they had agreed the season-long loan of the Spanish Under-21 international, who had struggled for game time in the Bundesliga.
The 21-year-old had been expected to return to Dortmund at the end of his stay at St James' Park but after starting in six of Newcastle's seven league fixtures, manager Rafael Benitez has decided to push through a long-term transfer.
The Magpies have said that Merino - who began his career at Osasuna - has penned a contract which will run until 2022.
Merino told NUTV: "I'm really happy to be here, and for this part of the contract to finally be official. I'm happy to be here for five more years and I hope to keep playing for this club and to give good things to all the people and the club.
"I have been focused on football always, but it's good to know it's now official and people will know it. I'm focused on my displays and improving myself, and I'm really happy to have signed this contract."
Merino is expected to feature when Newcastle face Southampton at St Mary's on Sunday afternoon.