Hamann was set to leave Liverpool at the end of the month on a Bosman but he spoke with Rafael Benitez and Rick Parry after the Reds won the European Cup and has agreed a new one year deal with the option of a second year.
"It's going to be hard to challenge for the title in the next two seasons, but let's give it a go," said Hamann. "The Premiership is the only club competition I haven't won since I joined Liverpool. I'm desperate for us to do it.
"The manager has achieved great things already by winning the Champions League and I know he's planning to bring in new players for next season.
"If we can settle quickly and everyone starts working together tactically early on, who knows what can happen? Who would have predicted we would win the Champions League a year ago?
"Maybe we can surprise the top three. It's going to be tough to do that, but I think we'll improve a lot."