The 72-year-old held preliminary discussions with chairman Steve Parish earlier in the term, with his previous deal due to expire at the end of the campaign.
A new contract was placed in front of the former England manager midway through February and he has now agreed to extend his stay at Selhurst Park.
Hodgson told the official club website: “I am delighted that the club and I have reached agreement to extend my contract.
“I am proud of what we have achieved since I was appointed two and a half years ago, and I look forward to us working together for the foreseeable future.
“Everyone knows how I feel about the club that I supported as a boy, I feel a special bond with the supporters and know that myself, the owners and the players are all working together to achieve the same goal.”
Hodgson was appointed Palace manager in September 2017, replacing the sacked Frank De Boer and was tasked with leading the pointless and scoreless Eagles away from danger.
He duly delivered, with an 11th-place finish secured before last season they came 12th and also reached the quarter-finals of the FA Cup.
This extended Palace’s longest ever spell in the top flight of English football and the 49 points obtained was the joint-highest the club have ever achieved in the Premier League.
Under the stewardship of Hodgson the club are on course to avoid the drop again and have barely been spoken about in terms of the relegation battle this campaign.
Chairman Steve Parish said: “I’m delighted that Roy has agreed to extend his contract with the club, and has reinforced his commitment to help us extend this period of unprecedented stability in the top flight.
“As I’ve said on many occasions, it is extra special that Roy has a long connection with the club and local community. He has established excellent relationships with everyone at the club, and crucially, the players trust and respect him.”
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