The 62-year-old managed to lead Fulham to seventh in the Premier League last season.
Hodgson told the club website: “It’s nice they want me to stay. I’ve always made it clear I’m very happy here.
“For us, the real important factor is to continue this run of years in the Premier League.”
“The club and the team are growing constantly and we are always running as fast as we can to make sure we don’t go backwards, so it’s nice to know that I’m going to be here for the years to come to enjoy that work,” continued Hodgson.
“I would like to take this opportunity to thank the chairman Mohamed Al Fayed, the fans and staff at the club for the faith they have shown in me during my time at Fulham.
“We will of course continue to work tirelessly to ensure that continued success is enjoyed on the pitch in the years to come.”