Atletico president Enrique Cerezo and Gabi had both confirmed an agreement was in place earlier this week.
“It’s a great challenge to be able to be in the team when we move to the new stadium,” Gabi told the club’s official website as the deal was announced on Friday.
“A new and exciting stage starts for the club and being the captain of the first team in a moment that will go down in history is a source of pride for me.
“I am very happy to continue one more year at home. I always say that playing with Atletico Madrid was my childhood dream, so I cannot ask for more than what I am living these years.
“I also want to thank the fans for their unconditional support both for me and for the team.”
Gabi has played with Atletico across two spells, starting his career for the club before returning in 2011 having spent four years away at Real Zaragoza.
He has never won a senior Spain cap, despite lifting LaLiga with Atleti in 2013-14 season and helping the club to two Champions League finals under Diego Simeone.