The English veteran's previous deal would have expired at the end of this month but Jurgen Klopp has moved swifly to bask on the experience of the 36-year-old for another season.
Milner made 39 appearances for Liverpool last season as they won the Carabao Cup and FA Cup.
The former Newcastle United, Leeds United and Aston Villa winger joined the Reds from Manchester City on a free transfer in the summer of 2015.
He has also won the UEFA Champions League, UEFA Super Cup, FIFA Club World Cup and Premier League in his time at the club.
"I'm very pleased to be staying for another season," Milner told the Liverpool official website. "I have never taken playing for this club for granted and I never will.
"An overriding feeling for me - and a vitally important one in the process - was the belief I can still contribute to the team. The gaffer was clear what he thought and that was a big factor in me extending my contract.
"As long as I can still play my part, that's not something easy to walk away from. Last season was extraordinary, even though it didn't have the ending we hoped it would. But I think that will only make us all even hungrier for more success, to be honest. I felt that after the parade and that played a part in my decision-making also. It's a unique club.
"Now this is signed, I'm already looking forward to getting back with everyone, refocusing and going again. It's a brilliant dressing room to be part of."
