Ceballos joined the Premier League side before the beginning of the 2019-2020 season in a loan move from La Liga outfit Real Madrid.
The 24-year-old had a bright start to life in North London but his season was interrupted by a hamstring injury. Ceballos racked up 37 appearances in all competitions for the Gunners scoring two goals and providing two assists, despite his reoccurring niggles.
Media reports have opined that Arsenal will cover all of Ceballos' wages during his time in England and the deal does not include an obligation to buy at the end of the 2020/2021 season.
Ceballos, who joined Real Madrid from La Liga rivals Real Betis in 2017, will continue to wear his number 8 jersey next season.
“Dani was an integral part of our team last season and finished the season in excellent form," Arsenal head coach Mikel Arteta told the club's website.
“I love Dani’s passion and commitment and he’s a highly skilful player. We’re all delighted to welcome him back and we look forward to seeing him pick up where he left off.”
Arsenal technical director Edu added: “We’re thrilled to have Dani back with us for the new season. We all know his qualities after an impressive 2019/2020 campaign, which ended with him playing a key role in our FA Cup success. We’re excited to add Dani to the list of quality players we are bringing in.”
