The 72-year-old has led the Eagles to 11th and 12th place finishes in the Premier League over the last two seasons and looks likely to keep them up this campaign.
The new deal will ensure Hodgson's managerial career will go beyond 44 years and he said he is 'delighted' to have agreed new terms with his boyhood club.
Hodgson said: "I am delighted that the club and I have reached agreement to extend my contract. I am proud of what we have achieved since I was appointed two and a half years ago, and I look forward to us working together for the foreseeable future.
"Everyone knows how I feel about the club that I supported as a boy, I feel a special bond with the supporters and know that myself, the owners and the players are all working together to achieve the same goal."
Palace chairman Steve Parish added: "I'm delighted that Roy has agreed to extend his contract with the club, and has reinforced his commitment to help us extend this period of unprecedented stability in the top flight.
"As I've said on many occasions, it is extra special that Roy has a long connection with the club and local community. He has established excellent relationships with everyone at the club, and crucially, the players trust and respect him."