The 24-year old right-back returned to Rovers from Welsh outfit The New Saints in the summer of 2011 after coming through the Prenton Park youth system.
He has made 64 appearances to date, including one in his initial spell, and follows fellow youngsters Cole Stockton and Jake Kirby in committing his future to the club.
Holmes' renewed deal runs until June 2015 and, in an official club statement, boss Ronnie Moore said: "I've been delighted with Danny's performances since I've been back at the club. He's developed into a really strong defender and I think he can still improve his game here.
"He's a local lad, he loves the club and he's the type of player you want to have in your squad."
Holmes added: "I'm really happy to have signed the new contract.
"Everybody knows how much I enjoy playing for Tranmere and I'm delighted the manager wants me to stay at the club.
"Hopefully we can push on in the final few months of the season and get into the Championship."