The new deal will keep the former Liverpool target at Atletico Madrid until the summer of 2018.
"I appreciate what the club has done in making me this offer to spend a long time here," Costa said in the official statement. "I hope to make myself into a much bigger footballer and to conquer all the objectives that the team has.
"I am very happy with his agreement after a lot of time fighting to win the respect and affection of the fans, of my team-mates and the people at the club. This is a very special moment. I am very happy here."
Atletico sporting director Jose Luis Caminero said: "It was one of the club's priorities and it is great news for all atleticos.
"Diego Costa is one of the key pieces of the team, and it remains our policy to maintain the 'block' that has given us so many successes in these last years. The extension of his contract was one of our objectives."