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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Since Guus Hiddink arrived at the helm, Chelsea have improved considerably after a tricky start to the campaign.
Newcastle United are staring down the barrel of relegation to the Championship for the second time in the past eight years.