The 29-year-old, who has one senior England cap to his name during his time with Preston, scored 20 goals in the Sky Bet Championship last season to help the club clinch the league title.
He becomes the latest player from the promotion-winning side to put pen to paper on a new deal at the King Power stadium, following in the footsteps of goalkeeper Kasper Schmeichel, captain Wes Morgan and midfielder Danny Drinkwater.
Nugent told the club's official website: "I'm delighted to have signed for two years and I'm really looking forward to testing myself with the rest of the squad in the best league in the world.
"Last season was the best of my career in terms of goals and assists, but I wouldn't have managed it without the lads around me.
“So I'm really pleased the squad has been kept together. I think we've got a great chance of doing well in the Premier League."
Leicester manager Nigel Pearson praised Nugent not only for his goalscoring record but also his overall contribution to the team.
"David's contribution to the squad goes a lot further than the goals he scores or the assists he provides," said Pearson.
"He's a striker that works incredibly hard for the team and helps us to set a tempo that other teams found difficult to cope with last season.
"He's a hugely popular, infectious character in the dressing room and a really important part of this group, so I'm delighted that he'll be staying with us in the Premier League."
Nugent has been Leicester's leading scorer in all three seasons since he joined them in 2011 following a four-year spell with Portsmouth, scoring 54 goals in 148 appearances for the Leicester.
The striker has previous Premier League experience during his time with Portsmouth and Burnley, who he played for while on loan from the south-coast club.