The 29-year-old midfielder's previous deal expired in June 2015.
A statement from AC Milan read: "AC Milan announces Sulley Muntari has signed a contract until June 30, 2016."
Muntari, who is currently competing with Ghana at the World Cup in Brazil, joined the Rossoneri in 2012 from Inter Milan.
Since then, he has scored 11 goals in 66 appearances for Milan.
The African star was linked with a return to England this summer with West Ham and Hull among the clubs reportedly leading the chase to sign the talented midfielder.
Muntari, who scored five goals in 26 league appearances for Milan in the 2013-14 campaign, played at Portsmouth and Sunderland earlier in his career.
Milan finished eighth in Serie A and failed to qualify for European football for the first time since 1998.