The Premier League club have exercised an option to buy the Spanish midfielder, converting his loan move into a permanent transfer with immediate effect.
Merino joined Newcastle on loan in July but he has now committed his long-term future to the club by signing a five-year deal.
The 21-year-old has played all seven matches for the club in the Premier League so far.
“I’m really happy to be here, and for this part of the contract to finally be official. I’m happy to be here for five more years and I hope to keep playing for this club and to give good things to all the people and the club,” he told the club’s website.
“I have been focussed on football always, but it’s good to know it’s now official and people will know it. I’m focussed on my displays and improving myself, and I’m really happy to have signed this contract.”
Manager Rafa Benitez added: “I’m really pleased we have been able to bring Mikel to the club permanently. He has played very well since he joined us. He has settled in quickly, has a lot of quality on the ball and is keen to learn – that is a crucial part of his future development.
“He has made a great impression at the club, and he is a good professional. He has confidence, but he is still young and has things to improve. He has to keep working hard and playing well, and hopefully he can improve and enjoy playing here.”