"AC Milan reports that Massimiliano Allegri has prolonged his contract until 30 June 2014," read a statement on the Rossoneri website.
The former Cagliari boss guided Milan to the title last season - his first in charge, but despite ongoing talks last year he had failed to reach agreement over the terms of a new deal.
Milan, who meet Arsenal next month in the last 16 of the Champions League, go into Sunday's derby against Inter joint top of Serie A alongside Juventus after a 12-match unbeaten league run.
Gennaro Gattuso and Alberto Aquilani will both miss the Inter clash after the club confirmed the midfielders needed more time to recover from respective eye and ankle injuries.
"Gennaro Gattuso must undergo a period of rest and dedicated therapy," read a statement on acmilan.com. "Alberto Aquilani is suffering pain to his left ankle. He will begin a recovery programme that is expected to last a month."
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