The England international would have been a free agent at the end of the season, and Arsenal have been in protracted negotiations to seal a lucrative extension which would make Walcott among the highest paid players at the club with what is understood to be a three-and-half-year contract worth close to £100,000-a-week, and boosted by a lucrative signing on fee.
Walcott joined Arsenal as a raw talent from Southampton seven years ago, and the announcement ends speculation he would follow former captain Robin van Persie out of Emirates Stadium in the summer.
Walcott was linked with moves to Liverpool and Manchester City, but maintains his first choice was always to remain with the Gunners.
"I am very happy to have signed a new contract here at Arsenal. Thanks to everyone for their continued support, especially the manager, everyone at the club and most importantly the fans," the England forward said on the club's official website, www.arsenal.com.
"I have made it clear from the start that I wanted to stay at Arsenal, so I am pleased we have agreed a deal that everyone is happy with. What is important now is for the team to realise its potential and win trophies."
At his press conference on Thursday ahead of the Barclays Premier League trip to Chelsea, Gunners boss Arsene Wenger revealed a deal was imminent, bringing to an end months of speculation.
The Frenchman hopes Walcott, 23, will now be able to go on and fulfil his potential for the north London club.
"We are all delighted that Theo has signed a new contract. He joined us as a 16-year-old and since then has developed very well to become an extremely important player for both Arsenal and England," Wenger said.
"Theo is a strong player and also a great person, and the combination of his ability and pace always make him such a valuable asset either from the flanks or down the middle. Theo's contract extension now gives us a strong nucleus of ambitious young players who have committed to the club and want to be successful with us as a group."