The 40-year-old, who took over at the Emirates in December 2019 following the dismissal of Unai Emery, is close to leading the Gunners back into the Champions League after a five-year absence.
Arsenal are fourth in the Premier League table, two points clear of north London rivals Tottenham with just four games to go.
The Spaniard said Friday he was "really happy" to have signed his new deal at the club that he captained when he was a player.
"We want to take the club to the next level and to compete really with the top teams," he said.