Benitez, who began last season in charge of Real Madrid, was hired by Newcastle in March to try to extricate them from the relegation zone, a feat he just failed to achieve.
The 56-year-old Spaniard won three of his 10 games in charge, but Newcastle finished 18th, two points adrift of their local rivals and Premier League survivors Sunderland in 17th.
Benitez, who took over from Steve McClaren, had a clause in his contract that allowed him to leave St James' Park if Newcastle were relegated to the second tier Championship, but he has signed a new deal that will keep him at the club until 2019.
"I am extremely pleased to be staying at Newcastle United," Benitez, a Champions League winner with Liverpool in 2005, said in a statement on the club website (www.nufc.co.uk).
"The love I could feel from the fans was a big influence for me in my decision to stay, as was my relationship with (managing director) Lee Charnley and all the staff."
While Benitez was unable to prevent Newcastle falling out of the top flight, he won over the club's fans by rapidly improving performances.
He led Newcastle to a six-game unbeaten run and ended the season with a comprehensive 5-1 victory over Tottenham Hotspur.
"He has captured the hearts and minds not just of the fans, but of everyone who has had the pleasure of working with him at the club thus far," Charnley said.
"As a world-class manager we had no doubt in our minds as to the importance of retaining him at Newcastle United."
(Writing by Toby Davis; Editing by Neville Dalton)
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