The Spanish international had two years remaining on his current contract with the La Liga champions, however after a frustrating season which saw him make only a handful of league appearances, the defender was linked with a move away from the club.
Albiol has made 63 appearances for Madrid in his three campaigns in the Spanish capital and won his first Spanish league title under Jose Mourinho last season.
The 26-year-old moved from Valencia for a fee in the region of 15 million euros in June 2009 and became a regular at the heart of the Los Blancos defense due to the absence of Pepe through injury.
But he made just 10 appearances in the league last season, as he played back-up to the regular center back pairing of Ricardo Carvalho and Pepe.
There were rumors 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.