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.
Coach Diego Simeone has signed a contract extension with Atletico Madrid that will keep him at the Spanish champions until 2020.