Japan international Kagawa, in his second spell with Dortmund having rejoined from Manchester United in August 2014, was due to be out of contract at the end of the forthcoming season but is now committed to a stay at Signal Iduna Park for a further two years.
Over a combined five campaigns with BVB, Kagawa has won two Bundesliga titles and twice lifted the DFB-Pokal.
Dortmund are currently on tour in Kagawa's homeland and he told a news conference in Tokyo: "BVB with its incredible fans has grown in my heart.
"I am very happy to continue to be a part of this extraordinary club in one of the best leagues in the world with the highest number of spectators."
Dortmund sporting director Michael Zorc added: "We are very fortunate that Shinji will play for us over the next three years.
"Shinji identifies with our club, the city and our fans. He is one of the most experienced players and he is an exceptionally important anchor in our overall young team."
Dortmund take on Klassiker rivals Bayern Munich in the DFL-Supercup on August 5 before a DFB-Pokal tie at Rielasingen-Arlen. They get their 2017-18 Bundesliga campaign up and running away to Wolfsburg on August 19.