The deal amounts to a four-year extension through 2009 and totals about $47 million.
The 29-year-old right-hander, who has a career record of 92-39, a winning percentage of .702 and an ERA of 3.30, was acquired from the Athletics in an off-season trade.
"Tim has established himself as one of the premier starting pitchers in the game," Braves General Manager John Schuerholz said. "His remarkable career stats to date give us good reason to feel that he can be the cornerstone of what we believe will be another era of great starting pitching in Atlanta."
Hudson is seen as a key player in Atlanta's bid for a 14th straight National League East championship in 2005.