The new deal will keep the 25-year-old at the club until the summer of 2015.
The Uruguayan midfielder has become a key player at Napoli since joining the club three years ago.
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The reputation of the Premier League means it is the most popular and one of the most watched leagues in the world.
Five English clubs will compete in the last sixteen of the Champions League for the first time ever as Liverpool, Manchester United, Manchester City, Chelsea and Tottenham face some difficult away matches.