The 30-year-old Australia captain, whose contract was due to expire this summer, has scored 99 goals in 128 matches since joining from Chicago Red Stars in 2019.
Kerr has won five consecutive Women's Super League titles, three FA Cups, two League Cups and the Community Shield at Chelsea.
She has also won the Golden Boot twice and was runner-up to Spain's Aitana Bonmati at the Ballon d'Or awards last year.
WSL champions Chelsea initially published a video, external on Thursday morning in which Kerr hinted that she was about to leave. The club published another video announcing the contract 20 minutes later.
Kerr said after signing her new deal as cited by Sports Central: "It’s really exciting and a very proud moment for me. "Having the opportunity to stay at a club like Chelsea means a lot to me. I’m really excited to continue to push and to try to win trophies."
Kerr has not played since January because of an anterior cruciate ligament injury and has been ruled out of the Australia squad for this summer's Olympics in Paris.
She is Australia's record scorer and one of the nation's biggest sporting idols.
In March Kerr pleaded not guilty after being charged with racially aggravated harassment of a London police officer.
She is scheduled to appear in court in February 2025.
