Terry sparked fears he was on the verge of leaving Chelsea against his will when he claimed in January he hadn't been offered an extension to his contract, which was due to expire in June.
With Italy coach Antonio Conte due to take charge at Stamford Bridge once his Euro 2016 commitments are over, it had been reported Terry could be eased out by the new boss.
But the 35-year-old former England defender was offered the new deal last week and, after speaking to Conte and Blues owner Roman Abramovich, he agreed to extend his 21-year stay with Chelsea by at least another season.
“I am delighted to sign a new contract with the club. Everyone knows I'm Chelsea through and through,” Terry told Chelsea's website.
“I am looking forward to next season under the new manager and hopefully we can make it a successful one.
“Also, a special mention to the fans for their continued support. You're the best in the world.”
Terry, who missed the last two games of the season following his red card at Sunderland, gave an emotional post-match speech to Chelsea fans on the pitch following Sunday's match against Leicester.
But when the centre-back cancelled a party due to be held at Stamford Bridge on Monday as part of his presumed farewell, it was clear he was set to stay after all.
Terry opted to remain with Chelsea after reportedly considering offers from Chinese clubs Shanghai and Jiangsu Suning, with both said to be offering lucrative two-year contracts.
Terry signed for Chelsea at the age of 14 and has made 703 first-team appearances, the third-highest in the club's history, with a club-record 570 of those as captain.
He has won a glittering array of silverware with Chelsea, establishing himself as one of the club's all-time greats with four Premier League title, five FA Cups, three League Cups, a Europa League and the Champions League, although he was suspended for that final triumph against Bayern Munich.
Terry also won 78 England caps before his retirement from international football in 2012.
“We are delighted John will spend another year at the club,” Chelsea chairman Bruce Buck said.
“He has been the leader of the Chelsea squad throughout the most successful period in our history.
“He recently reached the 700-appearance mark, which is testament to his professionalism and dedication as well as his undoubted talent.” – AFP
Original source: Terry signs new Chelsea deal