The Spain international has improved the terms of a six-year contract originally signed when he arrived in July 2007. This reflects his reputation as one of the world's top strikers.
El Nino has bagged 50 goals in 83 appearances since joining from Atletico Madrid.
He also scored the winner as Spain lifted the Euro 2008 trophy last summer, helping to secure a Ballon d'Or nomination.
"I want to remain here," said Torres. "Since arriving at Liverpool I feel that there's a bond and commitment.
"We listened to the club's offer, which came on the back of two seasons of positive work.
"My objective now is to win a trophy with Liverpool next year."
The new deal includes an option to extend his stay a further year to 2014.
mods shd do some work