The 23-year-old, who has missed most of the season with a back injury, has been heavily linked with transfers to Manchester United and Bayern Munich in recent months
Gundogan, who has missed most of the season with a back injury, was heavily linked with an exit from Signal Iduna Park this summer, when he would have entered the final year of his existing deal.
But the 23-year-old has now seemingly settled the speculation surrounding his immediate future by committing himself to Dortmund for a further year.
"I am very grateful that my club gives me the opportunity to continue to be part of this special team and this very special environment," Gundogan told the club's official website.
"I will do everything to help my colleagues again soon and am very optimistic about the coming weeks and months. "
Sporting director Michael Zorc added: "We are very pleased with this deal against the backdrop of his injury-related special situation and hope that Ilkay will contribute his full potential in the coming season for BVB."
Gundogan's decision may come as a blow for United boss David Moyes, who is widely expected to invest heavily to bolster his central midfield this summer, with Bayern playmaker Toni Kroos also a target.