The new deal will keep the 26-year-old at Stamford Bridge until 2012.
Terry told the club’s website: “I’m really happy this has been concluded. There has been a lot of speculation but these things take time.
“I never had any doubts that I wanted to stay at Chelsea and that the club wanted me to stay.”
He added: “I hope that the fans can see that we are all trying to build something special here, both for now and for the future, and I want to be a part of that.
“I have been at Chelsea all my career and have the privilege of being captain. Now it’s time to look forward to the new season, which we are all very confident about.”