The Spain international had two years remaining on his current contract with the Liga champions, but after a frustrating season in which he only made a handful of league appearances, the defender was linked with a move away from the club.
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Albiol has made 63 appearances for Madrid in his three campaigns in the Spanish capital and won his first domestic title under Jose Mourinho last season.
The 26-year-old moved from Valencia for a fee in the region of €15 million (£12m) in June 2009 and became a regular at the heart of the Blancos defence, largely due to the absence of Pepe.
But he made just 10 appearances in the league last season, as he played back-up to the regular centre-back pairing of Ricardo Carvalho and Pepe.
But with Carvalho linked with a move away from the Bernabeu, and with Sergio Ramos tipped to return to right-back, he could find himself back in contention.
There had been rumours linking Albiol with clubs around Europe, including Liverpool, but he has ended any speculation about his future by extending his contract with the nine-time European Cup winners.