The 28-year-old centre-back, who joined in January 2005 from Bolton following a loan spell, has made over 300 appearances for the Cumbrians.
"We think Danny has played really well and we feel he has more than earned the activation of the clause in his contract," manager Greg Abbott told the club's official website.
"He's a strong, solid and determined character and he's another who loves the club. He's played the number of games he has for us because of the way he does things, professionally and without fuss.
"Danny is one of our experienced heads now and he'll have a big part to play in the dressing room with what we want to do next season."