Ambrose signed from Israeli side FC Ashdod on transfer deadline day in August 2012 and has been a regular in manager Neil Lennon's side.
The Nigeria international played a key role in Celtic's league and cup double during his first season at Parkhead and helped the club reach the last 16 of the Champions League.
The 24-year-old, who has become a fans' favourite, has formed a solid defensive partnership with new arrival Virgil Van Dijk and had no hesitation committing his future to the club.
Speaking exclusively to the Hoops' official website, he said: "I have thoroughly enjoyed my time at Celtic and I am absolutely delighted to extend my stay at such a fantastic club.
"It's simple, I love this club. Celtic are a massive club, one of the biggest in Europe, and the history behind the club is great.
"I have to thank the club, the management and everybody. I still believe I have a long way to go. But this deal shows how committed to the club I am.
"I feel at home here, my family is settled and that is important to me."
Celtic manager Neil Lennon praised his contribution to the team, singling out his ability to take pressure of the side with his trademark runs out of defence.
"Efe has been fantastic. He is low maintenance in terms of injury, he is always available to play," he said.
"He has terrific pace, athleticism and he is improving. He gives us an extra dimension to the way we play in terms of when teams are camped in.
"Efe is not afraid to bring the ball out from the back and take a risk now and again. I don't want to discourage that because he is becoming more and more consistently good at it and he has started the season very well.
"So I am delighted he has signed a new contract because he is an important player for us."