Balogun had been heavily linked with a move away from the club this summer, as his previous deal was due to expire at the end of the campaign.
The 19-year-old forward had been attracting plenty of interest, particularly from sides in Germany, with Bayer Leverkusen among those keen.
However,Balogun, who has shone for Arsenal’s youth sides and made his first-team debut this season, has now decided to stay at the Emirates.
He has signed a new four-year contract with the Gunners and Mikel Arteta is delighted to keep hold of one of the club’s most promising academy graduates.
“We have been extremely impressed with Flo this season,” the Spaniard said.
“He has continually shown his natural ability in many training sessions with us and we have been equally impressed with his early integration into the first-team squad on matchdays.
“He has given us glimpses with the performances and of course with his two goals already for the first team. The hard work starts here for Flo and we are all looking forward to supporting and working with him in the years to come.”
Technical director Edu added: “It’s great that Flo will continue to be with us. He is a very promising young talent and has already shown so much quality in his performances. We are all looking forward to working with him during his continued development in the coming years.”