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The 20-year-old, who had been linked with a number of top clubs, has committed his future to Goodison Park until 2018.
Barkley was a fixture in Roberto Martinez's side last season, playing in 34 of their 38 league games and his performances earned him a call up to England's World Cup squad where he featured in all three group games.
Barkley, who has had loan spells at Sheffield Wednesday and Leeds, has won nine England caps and was named on the shortlist for last season's PFA Young Player of the Year award.
Chairman Bill Kenwright said: “Everton and Ross have always been the perfect fit – Roberto has made it even more special.
"This was an important agreement and I have to say was conducted in a way that showed clearly the devotion to Everton Football Club of everyone involved.”
Barkley, who has been at Everton for nine years, said: "Signing a new contract is a dream. I've played for Everton most of my life and this is a big thing for me.
"It didn't take any persuading. As soon as I got told about it I wanted to sign.
"I don't go looking for new contracts, I go on the pitch hoping to play well and earn that contract and I seem to have done that throughout last season.
"The better you play it just comes to you, you don't have to go looking for one. I just want to focus on doing everything right on the pitch and that will lead to bigger and better things."
Martinez was delighted to see the midfield star commit his future to Everton and believes he has the talent to become a club legend.
"Ross has signed a new contract to reflect his new role and development," said the Everton boss. "When you talk about assembling squads and getting ready for the new seasons for us it is as big news as you can get.
"Ross is still a young man and there is a long way to go in his development but as it stands he is a massive part of our squad.
"It is a big moment as every Evertonian will tell you Ross Barkley is the sort of player everyone would love to pay to watch him play.
"He brings back memories of the big legends we've had at the club. But saying that he is a young man and his best years are yet to come.”
The Spaniard believes Barkley's new contract gives the club a huge boost as Everton enter the new season and hopes this will quiet any transfer speculation surrounding the young England midfielder.
“To be able to tell our fans that Ross has signed a new contract that reflects the role he has in the team, gives us a real continuity and consistency going into the season, which is vital,” Martinez emphasised.
“This gives us peace of mind in avoiding speculation as you always enjoy the typical question about what is going to happen with players when they perform well.
“The reality is we are desperately looking forward to the new season and Ross is going to be a major, major part of anything that is happening at Everton Football Club.”