Liverpool captain Steven Gerrard has had a dramatic change of heart and decided to stay at Anfield.
The 25-year-old told Liverpool he wanted to leave after contract negotiations broke down.
Chelsea looked set to land Gerrard after having an initial £32m bid rejected by Liverpool.
But Gerrard has had another change of heart after talks with chief executive Rick Parry, who said: "He realises how much the club means to him."
Gerrard is now expected to sign the new contract on offer worth £100,000-a-week, a deal he initially snubbed.
Chelsea will be bitterly disappointed at the development after failing to land Gerrard in similar fashion last summer, when he was on the verge of a move to Stamford Bridge only to pull out at the last minute.
Parry had admitted defeat in the battle to keep Gerrard at Liverpool on Tuesday, but emerged on Wednesday morning to reveal the sensational twist.
He said: "Stevie's decided to stay. It's a little bit like last year, only even more dramatic.
"In the language he used to us, he never said he wanted to go. He never said 'I wanted to go'.
"I think in the last 24 hours he has reflected on it, he's thought it through and he wants to stay.
"There were lots of late-night phone calls and early morning phone calls. I couldn't be more delighted. It is what we wanted all along."
And he added he expected no problems over the new contract, saying: "I think that's already hammered out. I don't think there is an issue with that any more."
Gerrard's discontent is believed to have sprung from a feeling that he was not wanted at Liverpool because of delays over agreeing a new contract.
And Parry admitted: "I've apologised to Stevie if I have misread his emotions.
"I guess after winning the Champions League in Istanbul I thought I knew where we were going but he clearly thought for whatever reason that the club wasn't as enthusiastic about keeping him as we might have been. He was anxious.
"There were one or two issues with the contract which he took to mean a lack of enthusiasm on our part, which it wasn't. He understands that now.
"We've had some emotional moments together, cleared everything up and I don't think this will happen again."
Gerrard also defended his agent Struan Marshall, who has been accused by fans of trying to engineer a move away from Liverpool.
He said: "There seems to be a lot of blame heading in his direction over recent events.
"I can say from the bottom of my heart that he has carried out my wishes and I want to thank him for his support during this difficult period."