Reds boss Brendan Rodgers revealed at a press conference on Friday he was expecting the 22-year-old to sign a new contract soon.
And Kelly, currently out with a cruciate knee ligament injury, has put pen to paper on a new deal at Anfield.
The day after fellow defender Jamie Carragher announced his retirement at the end of the season, Rodgers was pleased to see another local lad commit his future to the club.
Rodgers said: "Martin has shown a commitment to our vision here. He is a young player who really impressed me when I came in.
"He was exceptionally good in the games he played earlier in the season."
The player, who injured his knee in the 2-1 home defeat against Manchester United in September, told his club's official website: "I'm delighted to sign. It means everything to me and my family.
"I've been at Liverpool since I was seven, so it's in my heart and I love the club.
"When you play in the Liverpool shirt, you have to show the fans what it means. I just love playing and trying my hardest for the supporters and for my family."
Kelly has made 54 appearances for Liverpool since making his debut in 2009.