The new deal will keep the 21-year-old with the Rojiblancos until the summer of 2018.
“I am happy to give more years to Atletico,” Koke told his club’s official website.
“I am on the team of my life and I cannot ask for more.
“I want to continue working to try bring new success and better achievements than last year. I am very happy.”
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Liverpool have unveiled their new home kit for next season, sticking with the hugely popular retro styling of the current shirt.
The reputation of the Premier League means it is the most popular and one of the most watched leagues in the world.