Pedrosa has ridden with Honda's factory team since making his premier-class debut in 2006, and the new deal will see him retain his seat until 2016.
The Spaniard sits third in the riders' standings, level on points with second-placed Valentino Rossi but 72 behind team-mate and leader Marc Marquez, and has expressed his delight at being able to extend his stay.
"I'm very happy to be able to announce my renewal with the Repsol Honda Team, and grateful to Honda for the trust they have shown in me for a further two years," he said. "It's the best way for me to continue in my racing career, together with the company I was with in my very first race.
"I am very excited to give my 100 per cent and continue to work together with everyone at Honda Racing Corporation."
A consistent performer, Pedrosa has finished second in the World Championship on three occasions, and has taken his place on the podium 90 times in 141 starts.
"We are very pleased to renew our contract with Dani," added Shuhei Nakamoto, executive vice president of Honda Racing Corporation. "He is enjoying a very strong season and is currently tied with Rossi in the Championship, we are very happy with his performance.
"The partnership of Dani and Marc has proven to be successful and we look forward to another two years of success."
Reigning world champion Marquez signed his own two-year extension in May.