Loftus-Cheek, who joined Chelsea's academy as an under-8, was due to enter the final year of his previous deal this summer and talks over a renewal had reportedly been complicated by a lack of playing time under former manager Jose Mourinho.
But interim successor Guus Hiddink has spoken of his desire to give Loftus-Cheek more first-team opportunities, and the 20-year-old scored his first senior goal for Chelsea in a 2-0 FA Cup third-round victory over Scunthorpe United.
"I'm delighted to sign a new contract at Chelsea and my focus is on working hard in training every day in order to push on and establish myself in the team," Loftus-Cheek told the club's official website. "It really means a lot because this shows the club believe in me so I'm really happy.
"The club have done so much for me since I started here as an Under-8 and now I want to repay the faith they've shown in me with my performances on the pitch."
Speaking at his news conference later on Monday, Hiddink said Loftus-Cheek would have "options" to play in the coming weeks.
"We've got him in training and also made a special analysis of the way he has to progress, and he's working on that," Hiddink said. "It will pay off in the upcoming games.
"He's a young guy -- when I came here I thought he was 23, 24 but he was just 18, 19 -- but he has a big future and we have worked with him on a specific plan where he can improve. I don't give any guarantees but he will get his minutes."
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