The 21-year-old joined the Saddlers last summer from West Brom after coming through the youth system at The Hawthorns.
Downing has been rewarded for a number of impressive displays in the Walsall back four and manager Dean Smith is happy to have tied down a key member of his squad.
"Paul has really impressed me during his time at the club," Smith told the club's official website.
"He's had to bide his time, but stepped up when called upon and has done very well for us.
"He's been an important member of the team during our winning run and I am delighted that he has committed himself to the club.
"Paul has come from really good stock; he was brought up the right way at Albion and his attitude and hunger will stand him in good stead for the future.
"He is an excellent professional to work with and I look forward to overseeing his continued development."