The 18-year-old, who has become a regular in coach Brendan Rodgers’s side this season, penned the extended and improved deal on Friday afternoon.
"It's every 18-year-old's dream. I'm just really grateful to be at such a big club like this,” Sterling told the club’s website.
"There's a lot more to be done. I haven't begun yet, as the manager has said. Hopefully I can kick on after the New Year and try to do my best for the team and the football club."
Sterling, who joined the club’s academy from QPR in February 2010, has racked up 25 first-team appearances already this season and became the club’s youngest ever international player when he started for England against Sweden.
Managing director Ian Ayre said: "This is another positive step forward for the football club in securing the long-term future of one of the country's brightest young talents.
"The negotiations were very positive and both parties acted in a very responsible way to reach an outcome that benefits both Raheem and Liverpool FC.
"Since the summer, Luis Suarez, Daniel Agger, Martin Skrtel, Jonjo Shelvey and Suso have all signed new long-term contracts and it's a clear indication of our intent to keep the players we believe are crucial to bringing success on the pitch.
"It also shows the belief the players have in the vision and leadership of Brendan Rodgers and everyone at this football club."