The new deal will keep the 27-year-old Ghana international at Stamford Bridge until 2015.
'I am delighted because the club has shown a very big confidence and interest in me,' said Essien.
New deal: Blues midfielder Essien has extended his stay at Stamford Bridge
'I am looking forward to coming back and enjoying my football and winning more trophies with the club. That is why I am here. I think it is one of the most important contracts in my career.'
Essien is currently sidelined with a knee injury that has ruled him out of the World Cup, and he has not featured for the Blues since suffering a hamstring injury in December.
Nevertheless, Chelsea boss Carlo Ancelotti revealed Essien remains an integral part of his plans as he bids to build on his side's double-winning campaign of last season.
'I am very happy that Michael has agreed to extend his time with us, as it means he will continue to be a very important player for Chelsea long into the future,' Ancelotti told Chelsea's official website.
Essien has made 185 appearances and scored 22 goals for Chelsea since arriving at the west London club in £26million deal from Lyon in 2005.
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