The 71-year-old took charge of the Eagles in September 2017 and guided the club to safety and an 11th-place finish last term despite being rock-bottom of the Premier League table without a single point or goal after seven matches.
The former Liverpool and England boss has now put pen to paper on a new deal which will keep him at Selhurst Park until at least the end of the 2019-20 campaign.
"I am delighted to have extended my contract with Crystal Palace. 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," Hodgson told the club's official website.
"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."
Chairman Steve Parish added: "I'm thrilled that Roy has agreed to extend his contract and I know the news will be a big lift to everyone connected with the club.
"We are looking to build on the hard work and results achieved last season and I believe this is the most important part of making that happen. It's of course fantastic that Roy has a long connection with the club and I think that understanding the South London mentality is a benefit but make no mistake he's here because he's the very best man for the job as we look to take this club forward on and off the pitch.
"I am equally pleased that Ray Lewington has also extended for the same period, putting us in great shape for this season and beyond."
Palace's first match of the new Premier League season will come against one of Hodgson's former clubs Fulham on Saturday.