Gnabry, 18, has featured frequently in Arsene Wenger's first-team squad this season after making substitute appearances in the Premier League and UEFA Champions League during the 2012-13 campaign.
The German youth international signed his first professional contract with Arsenal in the summer of 2012 and is now set to remain at the Emirates Stadium for the foreseeable future, although the length of his fresh deal has not been disclosed.
"We signed Serge Gnabry because I believe that he will be a great player. He's nearly there now, and competes for a regular place in the team in the Premier League," said Wenger.
"He has technical ability; he has power; he has pace; he has finishing quality and he can give a final ball.
"He's a powerful offensive player and I believe that he will be a great player for Arsenal Football Club."
Gnabry, who has featured in five games this season and scored his first senior goal against Swansea last month, expressed delight at committing his future to the club.
"Arsenal is a great football club and I'm so happy to be here and sign a new contract. For me, now it's all about working hard and developing my game," he said.
"I've had some good opportunities recently in the first team, which has given me extra confidence, and this will only improve my game. I'm looking forward to giving my best for this club in the years to come."
