The Spanish midfielder has impressed since being brought in on an initial season-long deal from the German giants, featuring in all seven of the Toon's Premier League matches this term.
The 21-year-old was also named the Magpies' player of the month for August, while he continued his recent good form during the international break, scoring in the Spain Under-21's win over Slovakia on Tuesday.
Given his burgeoning talent, Newcastle have wasted little time in agreeing a permanent deal for Merino, who has put pen to paper on a contract that will run until 2022.
"I’m really happy to be here, and for this part of the contract to finally be official. I’m happy to be here for five more years and I hope to keep playing for this club and to give good things to all the people and the club," he told NUFC TV.
"I have been focussed on football always, but it’s good to know it’s now official and people will know it. I’m focused on my displays and improving myself, and I’m really happy to have signed this contract."