The 34-year-old will now play in his 14th season for his boyhood club after signing a one-year deal.
Dunn has clocked up over 350 appearances and scored 59 goals in two spells at Ewood Park since joining as a trainee in 1997.
Manager Gary Bower had always been keen to retain Dunn, who was voted fans' favourite last season after scoring two fine solo goals against Bolton and Blackpool.
"I'm delighted that he's been able to continue his association with the club," said Bowyer on the club’s website.
"I think it is a rare commodity in football nowadays that a player starts at the academy and has a long career at the club.
"His experience will be invaluable this season on and off the pitch, he is Mr Blackburn Rovers."