The 24-year-old has won the UEFA Conference League and the FIFA Club World Cup since joining the club from Manchester City in 2023.
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"Chelsea means a lot to me, and I think the club is going in the right direction, so I'm delighted to sign, and I'm obviously very happy," Palmer said.
"Speaking to the owners, to the sporting directors and obviously the manager, they gave me a lot of confidence, so it was only right to sign.
"Speaking to players as well, everyone has the same ambitions. I feel like we win major trophies here consistently and I want to be a part of that and play a big role in it too."
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