Taylor, 27, was eligible to become an unrestricted free agent after the 2003 season, but the Jaguars were anxious to negotiate a new deal after he rushed for 1,314 yards and eight touchdowns and caught a career-high 49 passes for 408 yards last season.
"It's a deal that's likely to keep Fred here for the rest of his career," Jaguars vice president Paul Vance said. "It's a very important deal to the team, but it's very fair and it's highly rewarding to him and the team."
Despite the extension, Taylor's salary cap number of $3.6 million in 2003 will remain the same. His base salaries for the first two years of the extension are $1.63 million and $1.55 million and escalate to $2.55 million in each of the last two years.
The contract is heavy in incentives, with Taylor able to earn about $2.6 million extra each year.
"It takes into account his potential to be the best running back in the league and it's another step in trying to build a winner in Jacksonville," said Vance, who has been negotiating with Taylor's agent, Drew Rosenhaus, since early February. "I had always had a good working relationship with Drew.
Drew feels Jacksonville is a good place for Fred; grass field and no state income tax."
Those factors helped the Jaguars land two prominent free agents in the offseason -- pass-rushing defensive end Hugh Douglas and linebacker Mike Peterson.
When healthy, the 6-1, 232-pound Taylor ranks among the NFL's premier all-around backs. But he missed 23 games from 1999-2001 due to an assortment of injuries. The most severe was a groin injury that sidelined him for all but two games in 2001.
Last season was the first in which Taylor played in all 16 games.
A 1998 first-round pick out of Florida, Taylor became an immediate starter as a rookie and rushed for 1,223 yards and 14 touchdowns in 15 games. He missed six games in 1999 with a hamstring injury and rushed for just 732 yards.
Afer missing the first three games of the 2000 season with a sprained right knee, Taylor rushed for a career-high 1,399 yards, sixth in the NFL.
But after it appeared Taylor had joined the ranks of the elite, he suffered a groin injury in the second week of the 2001 season and ended up missing the last 14 games.