Simeone, 44, has led Atletico to a host of trophies since becoming coach in 2011, including last season's La Liga title and the 2012 Europa League crown.
They were runners-up to Real Madrid in the 2014 Champions League final, who they face in this season's last eight.
"I am here because I'm convinced the club will continue to grow," he said.
Simeone is widely regarded as one of the best coaches in European football, and was reported to have been linked with a number of clubs, including Manchester City.
"Nobody embodies the values of our club more so than Simeone," said club president Enrique Cerezo.
The Argentine guided Atletico to their first title since 1996 last year with a last-day draw at Barcelona.
His side were then seconds away from winning the Champions League until Sergio Ramos's header took rivals Real into extra-time.

The company's flotation on the Nasdaq stock exchange had initially raised a less-than-expected $286m (Â£170m).
However, investors flocked to the shares, and they ended the day at $20.24, after opening at $17.
The number of Weibo users fell after China's censors strengthened control of online discussions last year.
The China Internet Network Information Center said in its annual report that almost 28 million people abandoned Weibo in 2013.
The sale is a big test of demand for Chinese internet stocks ahead of an anticipated listing by Weibo's co-owner, the Alibaba group.
China's internet market has grown to become the world's biggest with more than 500 million users.
With major global social networking firms such as Facebook and Twitter blocked in the country, domestic companies have benefited the most from this growth.
However, the growing popularity of social media platforms has also attracted the attention of authorities who have moved swiftly to silence voices online.
Coach Diego Simeone has signed a contract extension with Atletico Madrid that will keep him at the Spanish champions until 2020.
[NEXT_CONCEPT]
Shares in China's Weibo, a Twitter-like service, rose by almost 20% on their first day of trading on the US stock market, after a lukewarm start.