The 29-year-old World Cup winner's deal was set to expire in 18 months' time, with Manchester United one of the clubs who had been linked with a move for him either in January or in the summer as they look to bolster their midfield options.
But Barca president Sandro Rosell on Thursday confirmed the player will remain at the Nou Camp until June 2018.
Rosell told the club's official website: "Andres Iniesta's renewal is confirmed. It's a great Christmas present.
"He will stay with us until 2018 and he could renew every year after that based on his playing performances."
Iniesta has made 479 appearances for the Catalan club who he joined from Albacete as a 12-year-old in 1996 and has most notably won the Champions League three times and the Primera Division title on six occasions.
The Spain international, who has scored 48 goals for Barca since making his first-team debut in October 2002, has played a key role in helping Barca win 16 titles in the last five-and-a-half years.
On the international stage, he has twice lifted the European Championship trophy and delivered the World Cup to Spain for the first time with his extra-time winner against Holland in South Africa three years ago.
A signing ceremony will be held at the Nou Camp on Monday, December 23.