The Swiss midfielder had two years left in the previous contract with Gunners signed back in 2018.
The 28-year old reportedly agreed personal terms with Roma but a move failed to materialise in the end.
He was expected to end his five-year stay in North London to join Jose Mourinho’s side.
With Thomas Partey injured, Xhaka has to play an important role in the starting XI.
He captained the side in Arsenal’s disappointing defeat to newly-promoted Brentford.
“Granit is going to stay with us. He’s a player that we rate and value so much, he’s a key member of our squad,” said the Spaniard.
“He’s trained two days. He wanted to play today and I think it’s very clear commitment from his side that he wants to be here.”
Xhaka was also phenomenal in the Euro 2020 for Switzerland and helped his country reach the quarter-finals.
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