The Germany midfielder moved to Stamford Bridge from Bayern Munich in 2006 and has won two FA Cups and a Carling Cup in his time in the capital.
Ballack, 32, 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.
Prize guys: Michael Ballack (left) celebrates Chelsea's FA Cup triumph with midfield partner Frank Lampard
"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 added: "Michael has been a key member of our team for three years so we are naturally very happy that we have agreed the extension."
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