The 26-year-old forward has taken the Barclays Premier League by storm since joining from Rayo Vallecano for just £2million in the summer, scoring 13 top-flight goals so far this term.
His exploits had seen the Spaniard linked with a big-money move away from the Swans, but he has penned a deal to keep him in south Wales until 2016.
He told the official club website: "It was an easy decision for me. I am living a dream here at Swansea."
The announcement of Michu's new deal comes just hours before the Swans face Chelsea in the second leg of their Capital One Cup semi-final.
His goals have also helped the south-Wales club take up residence in the top half of the Premier League table.
His form has attracted the attention of Spain coach Vicente del Bosque and he is in line for a call-up to face Uruguay in next month's friendly international.
And despite the speculation over whether his future may lie away from the Liberty Stadium, Michu, who arrived on a three-year deal in the summer, found it a simple decision to commit himself to Swansea.
"I'm probably enjoying my football more than ever. It's easy to play with this team and tonight I have the chance to reach the first final of my career," he said.
"I'm really happy here in the city with the people, the club and the fans. Everyone has been so nice to me since I arrived."