The Uruguayan has been pivotal for the club this year during a transition under Brendan Rodgers, firing the goals to keep them in the hunt for a Champions League spot.
“I hope [to be at Liverpool] for a very long time because it’s a massive club that kids dream about playing for”, he told his club’s official site.
“I’ve been very proud to be at a club like Liverpool and to have made the decision to come here. In two years I’ve lived through some spectacular and very special moments that I will never, ever forget.”
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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.