The 20-year-old forward is rewarded for his exceptional form this season with a year-long extension to his current deal which will keep him at the club until 2018
The 20-year-old has been the standout player for the Rossoneri this season, notching 18 goals and four assists in his 33 games to date in all competitions.
His electric early-season form saw him linked with the likes of Manchester United and Manchester City but the forward has quashed any suggestions that he may be tempted to quit the club by extending his current deal, with Milan confirming the news on their official website.
Reports emerged at the end of January that progress had been made on a new deal for El Shaarawy, with his agent, Roberto La Florio, revealing at the time that talks would likely begin imminently.
The Italy starlet joined the San Siro side in the summer of 2011 from fellow Serie A side Genoa and has been crucial to Milan's efforts to rebuild the squad following wholesale changes last summer, with his goals helping to propel the side back into contention for a top-three finish this season.