The Argentinian's current deal was due to run out this summer and it was said that a number of clubs including United were interested in signing the 28-year-old.
However, Solari, has decided to stay in Madrid following talks with club president Florentino Perez.
"In this contract renewal, the attitude and the aims of the president have been vital," Solari told the club's official website. "My objective is to maintain my form and to work at a level in accordance with the prestige of this club and the affection that all of the fans have shown me."