Reports emerged earlier this week that Chelsea had activated a £35m release clause in Olise's contract.
The 21-year-old was one of Palace's best players last season, laying on 11 assists and scoring two goals in 37 Premier League appearances.
But on Thursday Crystal Palace chairman Steve Parish took to social media to announce that the France u-21 international has committed his long-term future to Roy Hodgson's side.
The news comes as a big boost to Palace, who lost long-time talisman Wilfried Zaha to Galatasaray earlier this summer.
Speaking on Thursday, Palace Hodgson said: "It's the best possible news we could have. The decision has been his.
"We’ve been concerned, as one is concerned when a club of Chelsea’s stature start to take an interest in a player and suggest that a move to them might be the best bet.
"I’ve always hoped that wouldn’t be the case and that Michael would realise that, at such a young age, his future here is very bright. We can help him move very quickly to another level.
"I had a long chat with him when the subject was first broached but that was in pre-season. I suggested that being at Crystal Palace would be the best option but I also made it clear I wouldn't put him under unnecessary pressure.
"I congratulate Steve Parish and [sporting director] Dougie Freedman on a fantastic job."
Olise is currently nursing a hamstring injury that forced him to miss Palace's 1-0 win over Sheffield United in their Premier League opener last week.
