Maldini, who will turn 40 at the end of June, announced in December that he intended to quit football after this season.
However, he admitted to be reconsidering that decision last month when he revealed that he would asses his physical condition at the end of the season before deciding on his future.
On Friday he made his decision to continue official by signing a one-year extension with the club he has played for during his entire 24-year career.
A statement on the Milan website read: "AC Milan announce that their captain Paolo Maldini has extended his contract until June 30 2009."
The former Italy international revealed he decided to stay on following talks with his coach and team-mates.
"My decision was originally to stop, but given that the club asked me to stay I spoke with the coach and with my colleagues and seeing as they felt the same I've decided to continue," he told the club website.
"Playing football is something that I like doing and I think I can still do it well.
"Everyone was worried, I think that this is the outcome they were hoping for."
Maldini added that once he decided to continue it did not take long for him to agree terms on the new deal, and said that the challenge of trying to win the Serie A title for the first time since 2004 gave him extra motivation to play on.
"It was the time Adriano Galliani and I had met to discuss it and seeing as we both wanted what was best for Milan it wasn't difficult to reach an agreement," he continued.
"The Scudetto is a title that has been missing for a while, in the last 10 years we've won it twice so that will be an extra motivation for next season."