The rumours over Benitez's future reached a climax before the first leg of the tie against Real Madrid when some bookmakers stopped taking bets on him being at the club beyond the end of the week.
But the Spaniard insisted he was surprised by the speculation and that he was confident of staying as talks continued.
He is believed to have turned down a number of drafts of the deal in order to get his way on certain issues, with one understood to be the club's transfer policy, before reaching agreement.
Benitez has now signed against the continued backdrop of a strained relationship between co-owners Tom Hicks and George Gillett, while the club also recently announced chief executive Rick Parry was to leave the club at the end of the season.
That move increased the likelihood Benitez would commit his future to the club as the Spaniard was unhappy at Parry's slowness in completing transfer deals.
Hicks, who admitted to talks with Jurgen Klinsmann in November 2007 about taking over as Liverpool manager if Benitez left, said: "It is wonderful news that Rafa has made a long-term commitment to the football club.
This gives us great momentum going into the final stages of the season
Liverpool co-owner George Gillett
"Since he became manager in 2004, he has been responsible for the great progress we have made.
"I know he will continue to build on his achievements as he has a tremendous hunger and desire to bring more success to the club - success our fans and everyone connected with the club deserves."
And Gillett added: "With Rafa continuing to manage the team, we can look forward to more great football and success on the pitch.
"He has special abilities and qualities which are admired here at the club and around the world.
"Coming after our excellent wins over Real Madrid and Manchester United, this gives us great momentum going into the final stages of the season."
Benitez has guided the Reds to victory in the Champions League final against AC Milan in 2005 and led Liverpool to victory over West Ham in the FA Cup final in 2006.
They again reached the Champions League final in 2007 but lost out 2-1 to AC Milan.
The Reds also recently came out as the number one team in European competition based on Uefa's co-efficient rankings system, which takes results over the past five years into account.
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