The Germany international joined the West London outfit in the summer of 2006 on a free transfer after his deal with Bayern Munich expired.
Ballack has always expressed an interest in extending his stay with the Blues beyond his initial three-year spell and terms have now been agreed for an additional 12-month stint.
The former Bayer Leverkusen player remains an integral member of the Chelsea squad and is looking forward to proving his worth to new manager Carlo Ancelotti.
Ballack told the club's official website: "I am very happy to be staying at Chelsea for one more year as it was always my intention to play in London at least until the World Cup in 2010.
"We had a fantastic end to the season winning the FA Cup and we are all looking forward to taking this success into the new season under Carlo Ancelotti, our new manager.'"
A Chelsea statement said: "Michael has been a key member of our team for three years so we are naturally very happy that we have agreed the extension."