The 24-year old Brazilian spent last term in his homeland and was expected to return to London but the Gunners have come to an agreement with Sao Paulo and Denilson will now remain at Estadio do Morumbi for at least another year.
"But fortunately, we spoke with Arsenal's directors and it was settled that the player will stay. I am sure that he will keep helping us a lot in this period."
Denilson added: "I am very relieved, this is a big happiness. Now, I have to be even more focused and work hard to help Sao Paulo win titles again.
"I am ready. I spent some days outside Sao Paulo to rest, so I am ready to get back on track and train with my team-mates. We have a very big game on Sunday."