Downing, 23, who had two-and-a-half years remaining on his existing contract, had been linked with a move to Tottenham.
But after no move came about during the January transfer window the club opened new talks with the England winger.
Manager Gareth Southgate expressed his delight at the news, saying: "We have spoken about needing a couple of new signings and for me this is as important as any.
"Stewart has been involved in so many of the good things we have achieved and it is great that he can now focus on football, which is what he loves to do best.
"He is very happy playing here. He is the first here on a morning, having a cup of tea in the kit-room, and is usually the last on the training ground, so he is the type of person and professional you want at the club. He thoroughly deserves his new contract and it is good news for him and the club.
"I wanted him as part of the club, wanted him to stay and I believed all along that he was happy here and I think this shows that.
"Hopefully he is hoping I'll be manager for a little spell but it is testimony that he believes this club is heading in right direction and he enjoys his football here. "He has the talent to be in the England squad and we can work with him on the training ground now he is settled."
Southgate suggested he would now turn his attention to securing England Under-21 defender avid Wheater on a long-term deal.
"I've had very positive discussions with David and his family this week, they want to be part of the club in the longer term and we have one or two things to negotiate," he said.
