The new four-year contract will keep the 21-year-old at Old Trafford until the summer of 2016.
"Danny has been with the club since he was eight years old and has made fantastic progress in the last couple of years - first out on loan and last year as a regular in the first team," manager Sir Alex Ferguson told the club's official website.
"He has become an important player at international level as well, as the maturity of his performances at the European Championship showed.
"This year is another important one for him. He has a bright future ahead of him."
"Playing for United is all I've ever wanted to do - it's the club I've supported all my life," Welbeck said.
"I can't wait for the challenge of the new season to play my part in helping the team compete for trophies.
"I'm learning all the time from the best manager in the game and I'm keen for that to continue alongside the world class players in the squad."