The Switzerland number one arrived in Wolfsburg in 2007 and he still had over a year left to run on his previous deal, but he said he did not hesitate to commit himself to a new deal which will keep him with the 2009 Bundesliga champions until 2017.
"It is a great feeling to know that I am still needed here and that the club is counting on me," said the 28-year-old.
"Wolfsburg has become my home and I am very happy in the city and I think I am well looked after at this club."
Wolfsburg coach Felix Magath is also delighted that he can rely on the Swiss shot-stopper in his ambitious plans to establish the club among Germany's elite.
"Diego Benaglio has achieved great things here, recently making a major contribution to us winning the German title," he said.
"We are really pleased that he would like to be part of our sporting development in the future too."