The new three-and-a-half-year contract will keep the 20-year-old at Villa Park until the summer of 2014.
Bannan made his debut for Scotland midweek.
“Everything this season has been unbelievable [and] to get the deal is icing on the cake really,” he said.
He added: “I could never have imagined this season going so well for me.
“I knew I was capable of playing the way I have been playing and it was just about getting the chance.
“I have really kicked on. The new gaffer [Gerard Houllier] has come in and really taken to me. I’ve had chances and I’ve taken them.
“It’s all come around so quickly, I haven’t really had chance to think about it. It’s just been an unbelievable start.
“I am over the moon to be at the club. It’s one of the biggest in the country.”
