The Republic of Ireland international was wanted by Middlesbrough after his superb 2014/15 campaign which saw him lead the Championship goal-scoring charts with 27 goals.
Boro submitted a £4m bid for the striker but the Tractor Boys turned it down and have rewarded Murphy with a new contract instead.
The 32-year-old admitted he is relieved to put an end to speculation regarding his future and said he never wanted to leave Portman Road.
“I’m delighted to have signed a new contract,” Murphy told Ipswich Player HD.
“All summer I have heard the rumours and seen the stories in the papers and I’ve had my family and friends ringing me and asking me what’s going on.
“I kept telling them I wasn’t going anywhere and not to believe everything they read in the papers.
“I was just trying to enjoy my holiday. I knew that I’d be here at Ipswich when I came back for pre-season and I’m just pleased now that it’s all out of the way.
“I have always said I’m happy and settled here and that has never changed. I have never thought about moving and now, having signed a new contract, I can put all that speculation talk to bed and look forward to the new season.”