The Algeria international, 25, had been strongly linked with a move to Arsenal this summer.
He scored 17 goals and added 11 assists last season and was voted the Professional Footballers' Association Players' Player of the Year.
Algeria international has followed striker Jamie Vardy in committing his future to Claudio Ranieri's side.
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But what does this contract mean for both sides??
Now that Mahrez has signed a new deal, that theoretically secures his Leicester future. The Foxes handed him a new contract, with a gigantic pay raise to be sure, to ensure he would stay at the King Power Stadium. But that's only a temporary solution.
Mahrez will stay at Leicester for this season, and why wouldn't he? The Foxes are in the Champions League and thanks to this new contract, Mahrez will be getting paid big wages. Everyone is happy. But what about next summer?Report foxsport
Mahrez was signed from Le Havre, in the French second division, in January 2014 during Nigel Pearson’s reign as manager. He started to blossom towards the end of the 2014-15 season, when Leicester won seven of their last nine matches to survive, and then took his game to another level during the title‑winning campaign.
He started this season with a goal, scoring from the penalty spot to equalise against Hull City last Saturday, but it was not enough to prevent Leicester from slipping to a surprise 2-1 defeat. With Arsenal also losing on the opening weekend, the game at the King Power Stadium on Saturday carries added significance for both clubs.
In an interview with France Football, he said: "The Premier League is a super league and I would like to stay here as long as possible.
"Now, there are two or three clubs in the world, that if they come for me, it definitely makes you think, if you understand what I am trying to say."
