By picking up the one-year, $1.75 million option, the Devil Rays beat the Nov. 1 deadline that would have made Lugo a free agent.
He joined Tampa Bay on May 16 after being released by Houston and batted .275 with a career-high 15 home runs and 53 RBI. He started 114 of 118 games after joining the Devil Rays and his RBI and home run totals are club records for a shortstop.
"Julio did a fine job for us in 2003," said senior vice president of baseball operations and general manager Chuck LaMar. "He provided us with more run production than we've had from that position in the past and his defense improved as the season wore on. We're glad to have him returning as a middle infielder next season."
Lugo batted .300 with 12 homers and 37 RBI after the All-Star break.