The France forward and World Cup winner, whose current contract expires on June 30, had been widely tipped to join Real Madrid.
But club president Nasser Al-Khelaifi revealed on Saturday that Mbappe will remain Paris.
"I'm proud to give you a beautiful piece of news - Kylian Mbappe has signed until June 2025 with Paris St Germain," Al Khelaifi said as he posed with the 23-year-old holding a Mbappe 2025 PSG shirt at the Parc des Princes before the last game of the Ligue 1 season against Metz
The 23-year-old, one of the game's finest talents who burst on to the scene as a teenager and helped France win the World Cup in 2018, could have left on a free transfer when his contract expired at the end of the season.
PSG signed Mbappe from AS Monaco in 2017 in a deal reported to be about 180 million euros, making him the world's second-most expensive signing after Neymar, who joined PSG from Barcelona for 222 million euros.
Real's bid to sign Mbappe last year was rejected by the Parisian club, who appeared prepared to lose him on a free transfer this year.
Reports last year claimed the Spanish champions had offered PSG as much as 200 million euros for the Frenchman.
PSG had no intention of selling their young talisman in their quest for Champions League glory, but the French club fell well short this season when Real staged a dramatic second-leg comeback in the last-16 to knock them out of the competition.
PSG were reinforced last year with the signing of Lionel Messi from Barcelona to add firepower to a star-studded squad. But apart from reclaiming the Ligue 1 title, the French club failed to win any other trophies.
Mbappe, however, excelled individually, scoring 36 goals and providing 26 assists for PSG in all competitions this season.
Asked about Mbappe’s situation on Friday, manager Mauricio Pochettino said: “I hope Kylian is still here for many years to come but I also can’t lie.
“I don’t know what is going to happen.
“There are lots of rumours going around but the player is the one who will have to talk about this.”