Real Madrid had also been linked with the 26-year-old, who caught the eye during last summer's World Cup finals.
Sealed with a kiss: Bastian Schweinsteiger kisses his jersey after announcing that he renewed his contract
But Schweinsteiger attempted to end to the speculation by revealing he had extending his contract by four years until 2016.
Grabbing the stadium microphone minutes after their 3-0 Bundesliga win over St Pauli, he told the fans: 'I have extended my contract and will stay here until 2016. Long live Bayern'.
Schweinsteiger, 26, has become an influential figure for club and country and helped Germany to a third-place finish at the World Cup in South Africa earlier this year.
Bayern coach Louis van Gaal recently urged the club to consider selling Schweinsteiger at the end of the season should he refuse to sign an extension, so as not to lose out on a lucrative transfer fee.
Committed: Bayern Munich's midfielder Bastian Schweinsteiger
The player, who has been at Bayern since the age of 14 and has won five German championships and five German Cups, hinted earlier this season that he could leave.
Bayern had already extended contracts to 2014 or beyond with several other leading players including Franck Ribery, Philipp Lahm, Thomas Muller and Holger Badstuber.
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Explore more:People: Franck Ribery, Louis Van Gaal Places: South Africa, Germany