The Spaniard's current deal was due to expire at the end of this season, but BBC Sport reports that all parties have now reached a final agreement after months of negotiations.
The length of the new contract has not been confirmed, though it is set to take Arteta into at least a 10th year in charge following his appointment in December 2019.
The new terms include a sharp increase on his current salary of £10 million a year plus an additional £5 million in bonuses. Arsenal chief executive Richard Garlick had said last month that Arteta would sign "very shortly", with negotiations then in their final stages.
Arteta addressed the speculation last week, before the agreement was finalised:
"They [the fans] don't have to worry about any of that because I want to be here. I'm extremely happy and I feel very grateful to work with the people I work with."
The extension rewards a run of success that has taken Arsenal from the toxicity of the Unai Emery era to the top of English football. Arteta won the Premier League last season, ending Arsenal's long wait for the title and denying Manchester City in the process, and the club have made a strong start to the defence of their crown this season.
He also won the FA Cup in his first year in charge, in 2020, having previously played for the club between 2011 and 2016 and served as Pep Guardiola's assistant at Manchester City before returning to the Emirates as manager. He is now the sixth longest-serving manager across the Premier League and English Football League.