The 26-year-old had been linked with a return to Valencia after struggling for first-team football in Madrid, making just 10 league appearances last season.
Madrid manager Jose Mourinho has managed to allay Albiol's fears and signed the versatile defender to a deal that keeps him at the Bernabeu until 2017.
Albiol told the club's official website: "I'm really excited to sign a deal to sign a deal to stay on at the club.
"I am very happy here and I hope to be here until I retire."
Albiol was a member of Spain's triumphant squad at the European Championships in Poland and Ukraine this summer.