Speculation raged over the England forward's future, with his existing contract set to expire in the summer.
Walcott would have been eligible to leave the Emirates Stadium on a free transfer, but has pledged his future to the club that signed him from Southampton in 2006 with his new deal worth around £100,000-a-week.
Walcott had previously rejected a five-year contract worth £75,000-a-week but his strong recent form as netted him a three-and-a-half year deal at the higher rate.
What's more, it is believed Walcott will pocketed a signing-on bonus of £3 million.
"I have made it clear from the start that I wanted to stay at Arsenal," the forward said, "so I am pleased we have agreed a deal that everyone is happy with. What’s important now is for the team to realise its potential and win trophies.”
“We are all delighted that Theo has signed a new contract," said manager Arsene Wenger. "He joined us as a 16-year-old and since then has developed very well to become an extremely important player for both Arsenal Football Club and England.
"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.”
The 23-year-old stated that money was not the main consideration in contract negotiations - rather that he wanted the opportunity to play up front, rather than on the right wing where he has spent most of his Arsenal and England career.
Although Walcott's inconsistent performances have frustrated, Arsenal fans will be pleased to have held on to one of their leading players.
In recent years the Gunners have lost the likes of Cesc Fabregas, Samir Nasri and Robin van Persie in the transfer market.