The 23-year-old was linked with a move to Tottenham Hotspur in the summer window, but any possible hopes of signing the Spaniard in the future have now been dashed.
Suso, who left Liverpool for San Siro in 2015 after failing to secure a regular first-team place, has put pen to paper on a contract that will run until 2022.
"This will always remain one of the most important days of my life," the midfielder told the club's official website. "I've extended my bond with Milan until 2022, and to do it with my family, my partner and my agent by my side filled me with emotion.
"A particular, special thank you to the Milan directors. I'll do everything for this shirt, as I've always done. Forza Milan, always."
Suso has made 50 appearances for the Italian outfit.