The 28-year-old joined the Potters from West Ham in January 2009 and has gone on to have a major impact, helping Tony Pulis' side to an 11th place Barclays Premier League finish last season and winning the club's Player of the Year award.
Manager Pulis said: "Matty has played a key role in our success since he came here so this is fantastic news for the club."
He added: "Natural left-wingers are like gold dust and we are fortunate to have one of the best in the Premier League who has shown that with his performances for us."
Etherington, who also counts Tottenham among his former clubs, had two years left to run on his current deal but the club decided to reward him for his excellent form by tying him to a long-term deal.
And Pulis believes the former England Under-21 international could be in line for full international honours following England's dire showing at the World Cup in South Africa.
"With his long-term future at the club settled, the lad can now concentrate on what he does best and that is showing people he is a top, top player," he said.
"It was unfortunate that injury struck last season when he had a good chance of forcing his way into the reckoning for England's World Cup squad, but the challenge for him this season is to try and improve upon his best form and put himself in contention.
"He is one of a number of players who must feel that opportunity knocks now following England's disappointing performances out in South Africa because there is every likelihood that Fabio Capello will look to introduce some fresh blood into his squad."
Source: PA
Source: PA