The striker found himself an integral part of the United squad last season, and although there was speculation over his future after United moved to sign Robin van Persie, the 21-year-old has committed himself to the club until at least 2016.
Manager Alex Ferguson told the club's official website: "Danny has been with the club since he was eight years old and has made fantastic progress in the last couple of years - first out on loan and last year as a regular in the first team.
"He has become an important player at international level as well, as the maturity of his performances at the European Championship showed.
"This year is another important one for him. He has a bright future ahead of him."
Welbeck, who was born in Manchester and is a boyhood fan of the Red Devils, said: "Playing for United is all I've ever wanted to do - it's the club I've supported all my life.
"I can't wait for the challenge of the new season to play my part in helping the team compete for trophies.
"I'm learning all the time from the best manager in the game and I'm keen for that to continue alongside the world class players in the squad."