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The 20-year-old, who received his first call-up to the Italian national team last October, had been linked with top Serie A clubs Juventus, Roma and Inter Milan.
But he opted to stay with his hometown club and extended his current deal by two years.
Barella made his Serie A debut aged 17, and has played 57 times for the first team, this season scoring his first goal in a 2-0 win over SPAL.
Playing for Italy's U20 side he finished runner-up in the 2016 European Championships in Germany, and third in the World Cup in South Korea this year.
Cagliari -- sitting five points above the relegation zone -- host champions Juventus in Serie A action this weekend.
