"It's official: Palacio has signed a two-year extension til 2016!" the club wrote on its official Twitter feed, before posting a photo of Palacio signing the deal with sporting director Piero Ausilio.
The agreement puts an end to a long period of negotiations between the club and the Argentina international, who is one of Inter's leading players and has scored 12 goals this season.
The Corriere Dello Sport reported that the deal has come after nearly a month of talks and will earn the forward 2.7 million euros a year plus bonuses.
Inter are fifth in Serie A on 44 points, 11 behind third-placed Napoli, who occupy the third Champions League spot. They travel to Hellas Verona on Saturday (1945 GMT).
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