The teenager has become a first-team regular since Brendan Rodgers took over in the summer and earned a first England cap against Sweden in November.
"It's every 18-year-old's dream," Sterling, who joined Anfield's academy from QPR in February 2010, told Liverpool's official website. "I'm just really grateful to be at such a big club like this.
"There's a lot more to be done. I haven't begun yet, as the manager has said. Hopefully I can kick on after the New Year and try to do my best for the team and the football club."
Managing director Ian Ayre said: "This is another positive step forward for the football club in securing the long-term future of one of the country's brightest young talents.
"Since the summer, Luis Suarez, Daniel Agger, Martin Skrtel, Jonjo Shelvey and Suso have all signed new long-term contracts and it's a clear indication of our intent to keep the players we believe are crucial to bringing success on th e pitch.
"It also shows the belief the players have in the vision and leadership of Brendan Rodgers and everyone at this football club."
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