The 21-year-old burst on to the scene in the Europa League last season and has managed eight goals and six assists in all competitions in 2014-15, despite suffering a hamstring injury in November.
Alcacer's contract was due to expire in the summer but he has now agreed a deal to stay at the club until June 2020, with Valencia confirming the news via their official website.
Alcacer, an academy graduate at Mestalla, has now vowed to help return the club to the summit of Spanish football.
"I am delighted and proud to be continuing at Valencia CF for five more seasons," he told VCFplay. "I want to thank the club for the confidence in me that they are showing. What I have to do now is pay them back by scoring goals and giving everything that I have to help the team.
"The only thing that I can say to the fans is 'thank you'. I thank you all for the support that I receive, on good days and bad days, and for the way you get behind the entire team. I am going to continue working, in order to become a better player and to take Valencia CF back to where the club belong.
"The target for Valencia is to get back into Europe. The Champions League is the main objective and I personally want to play an important role for the team."