The announcement of the new deal on Tuesday silences speculation linking the 47-year-old with a move to Serie A giants Inter Milan.
Simeone, whose previous contract was expiring at the end of the season, has been with Atletico since 2011, winning five trophies and reaching two UEFA Champions League finals.
Rojiblancos began 2017/18 with a 2-2 draw at newly promoted Girona, before thumping Las Palmas 5-1. They next visit Valencia on Saturday.