O'Brien, a member of the British and Irish Lions squad that toured Australia last year, had been linked with a move to France with Irish media reporting on Wednesday that he was close to joining European champions Toulon.
The former European player of the year, who is set to miss this year's Six Nations championship with a shoulder injury, will stay with Leinster until the end of the 2016 season, the Irish Rugby Football Union (IRFU) said on Thursday.
"It is flattering to find yourself the subject of interest from some of the biggest rugby clubs in the world but in the end I made a decision based on the standard mix of professional and personal considerations," O'Brien said in a statement.
"It was a very difficult decision but, with a World Cup next year and the fact that I believe Leinster can continue to win trophies, I have decided to commit my immediate future to the club."
After Lions flyhalf Johnny Sexton left Leinster for Racing Metro last year, following a host of internationals to the French league, the IRFU has been battling to keep some of the province's top players under central contracts.
Munster's Conor Murray and Donnacha Ryan signed new deals last year while Leinster number eight Jamie Heaslip, who is out of contract at the end of the season and has also been linked with a move to Toulon, has yet to agree fresh terms.
"Sean is one of world rugby's standout talents. He has proven for Leinster, Ireland and the Lions that he is a world class player and we are delighted Sean has committed his future to Leinster and Ireland for the next two years," IRFU chief executive Philip Browne said.
(Reporting by Padraic Halpin; editing by John O'Brien and Tony Jimenez)
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