Coquelin joined the Gunners in 2008 from French side Laval and has worked his way through the club's youth and reserve set-ups.
The 19-year-old made three first-team appearances last season and will spend the new campaign out on loan at Ligue 1 outfit Lorient.
The season-long stint has been arranged in an attempt to give the youngster a chance of playing regular first-team football.
The new deal - described only as "long-term" by the Londoners - ensures the Frenchman is tied to the Emirates Stadium after impressing the club's management during his two-years in North London.
Coquelin made 12 appearances for the reserves last season and also featured as a starter in a League Cup clash against West Brom and an FA Cup date with Stoke.
The France Under-19 international - who can also play in defence - made his other appearance as a substitute in a League Cup triumph over Liverpool.