Hodgson’s contract was due to expire at the end of the season.
He told the club’s website: “I am delighted. 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 wonder-ful 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.”
Hodgson took charge of Palace in September 2017 and recorded a 11th-place finish in the Premier League last season.
Crystal Palace chairman Steve Parish said: “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.”