The new deal ties Müller to Bayern until 2015.
The 20-year-old's starring role in helping Bayern to the double last season and in helping Germany into third place in South Africa has earned him an improved €3 million a year deal, local media reported.
Bayern president Karl-Heinz Rummenigge said on Friday: "Bayern rewards performance and Thomas Müller's performances last season was extraordinary.”
"Thomas has given us a lot of joy, he won the German league title and German Cup, and played in the Champions League final....we are very happy to know that his long term future is with Bayern."
The player himself added: "I feel at home at Bayern. I am proud to be wearing the Bayern colours for the next five years."