The new deal will keep the 22-year-old at London Road until the summer of 2015.
Posh manager Darren Ferguson told the club’s official website: “We’re all delighted. He’s done ever so well since he came. He’s settled well and I believe he has real potential.
“In his first season at this level he has proved he can handle it and I believe he can play in the Championship no problem at all.
“It’s a lengthy contract. Lee knows our ambitions and I think it’s important we get it out of the way because coming into March we need everybody focused on the job in hand.”