The former England boss turned the fortunes of Palace around after replacing Frank de Boer in September 2017, guiding them to an 11th-place finish in the Premier League.
Palace had been without a point or a goal when he assumed control at Selhurst Park but Hodgson slowly turned their fortunes around, the Eagles eventually finishing 11 points above the relegation places.
Hodgson has added Cheikhou Kouyate, Max Meyer, Vicente Guaita and Jordan Ayew to his squad for the new campaign, and the 71-year-old has agreed a deal of his own until the end of the 2019-20 season.
"I am delighted to have extended my contract with Crystal Palace," said Hodgson.
"It is a club that has been close to my heart since I was a youngster growing up in the borough of Croydon, and having stood on the terraces in the 1950s, it is a wonderful thing to be managing my boyhood club all these years later.
"We can be proud of our achievements last season in turning things around despite a poor start, but this year we want to ensure we don't endure the same struggles.
"I am thrilled that I have the support of the owners, who believe that I am the right man to help this club move forward and I will do everything I can to make that happen."