The deal, which runs until the end of the 2019-20 campaign, was widely expected although that did not prevent plenty of speculation a wealthy rival could try to lure Simeone away from the club he twice represented as a player.
"I have chosen to be here because I am convinced the club will continue to grow," Simeone told a news conference.
"Because it is strong, there is enthusiasm and there are people here whose desire to participate is stronger each day," added the 44-year-old Argentine.
A former Argentina captain said to play "with a knife between his teeth", the combative Simeone transformed Atletico after taking over at the end of 2011, leading them to their first domestic league title in 18 years last term.
Atletico won the Europa League at the end of his debut season and reached the final of the Champions League in 2013-14 where they lost 4-1 to Real Madrid after extra time.
They thrashed Chelsea 4-1 to claim the 2012 European Super Cup, won the King's Cup a year later by beating Real in the final and defeated their neighbours over two legs to secure the Spanish Super Cup in August.
Real will again be their opponents in the quarter-finals of the latest edition of the Champions League, with the first leg at Atletico's Calderon stadium on April 14 and the return at the Bernabeu eight days later.
"He triumphed as a player and became a club legend and we knew we weren't making a mistake when we proposed to bring him back as coach," Atletico president Enrique Cerezo told reporters.
"He has helped us underpin the club's growth with his tremendous success on the pitch and he has consolidated our place among the European soccer elite," he added.
Atletico are unlikely to defend their La Liga title this season as they are nine points behind leaders Barcelona in fourth with 10 games left.
As well as the Champions League last eight, Simeone's priority for the remainder of the campaign will be to secure a lucrative berth in Europe's elite club competition again for next season.
(Reporting by Iain Rogers, editing by Tony Jimenez and Pritha Sarkar)
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