England international Vardy, whose 24 goals propelled Claudio Ranieri's side to a fairytale title, had been strongly linked with a move to Arsenal.
"Leicester City have today agreed with the representatives of Jamie Vardy to extend the England international's contract with the Premier League champions for a further four years," the club said in a statement.
"Both parties hope that this announcement will end recent speculation regarding Jamie's future and confirm his long term commitment to Leicester City Football Club."
There were fears that Vardy's departure could have sparked an exodus of Leicester's key players such as PFA Player of the Season Riyad Mahrez and N'Golo Kante.
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Instead, the 29-year-old has signalled his intent to consolidate Leicester's new-found status and lead them in their first Champions League campaign.
Former Leicester and England striker Gary Lineker applauded Vardy's decision to turn down a move.
"A show of loyalty from @vardy7 and a show of ambition from @LCFC is to be applauded. Jamie to #remain" BBC presenter Lineker said on his Twitter account.
Media reports say Vardy's salary will rise to 100,000 pounds per week.
The champions have already started strengthening with defender Luis Hernandez joining on a free transfer from La Liga side Sporting Gijon on a four-year contract this week.
Hernandez's signing followed that of German keeper Ron-Robert Zieler from Hannover.
Vardy is currently part of England's Euro 2016 squad and scored an equaliser in his country's 2-1 victory over Wales.
(Reporting by Martyn Herman; editing by Sudipto Ganguly)
