The 19-year-old had been linked with a move away from the Weserstadion after impressing for Germany during the UEFA Under-19 European Championships.
Selke struck 11 goals in 10 games at the finals in Hungary as Germany lifted the trophy in July, causing some of Europe's top clubs to show an interest.
However, Werder have now announced that Selke will remain with the club until 2018.
"We are happy that Davie chose Werder for the long term," general manager Thomas Eichin told the club's official website. "He has shown the potential and proven his commitment.
"We are certain that he will take another important step in the coming years and will be a joy for all of us."
Selke made three senior appearances for Werder in the Bundesliga last season and has started two of their three matches in the current campaign.
He netted his first professional goal in the 3-2 victory over Illertissen in the DFB Pokal last month, but still awaits his maiden strike in the league.