Steele joined the Championship outfit in February 2008 on an initial loan deal before a permanent move later that year.
Earlier this month, Barnsley boss David Flitcroft admitted he expected the goalkeeper to depart Oakwell amid speculation the 28-year-old was being monitored by numerous clubs.
Flitcroft said: "I want players to be hungry and flexible and it could be that there is a bigger opportunity out there for Luke and I wouldn't want to stand in his way if that's what he wanted."
However, Steele has now committed himself to the South Yorkshire side on a contract until summer 2015.
Bobby Hassell has also agreed a new one-year deal that will see him stay at Barnsley for a tenth season.