The 33-year-old midfielder, who is under contract until 2028, reportedly turned down the chance to reunite with former Xabi Alonso, now Blues’ manager.
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Sunderland's ambitious long-term project, hopes of European qualification and Xhaka's strong connection with the club's supporters convinced him to stay.
Club captain under Regis Le Bris last season, he made 36 appearances, scoring once and providing six assists.
He is currently representing Switzerland at the World Cup, helping his country reach the Round of 16, where they will face either Colombia or Ghana.