James -- who turned around the Cleveland franchise by averaging a career-best 31.4 points, seven rebounds and 6.6 assists last season -- led the Cavs to the second round of the NBA Eastern Conference playoffs.
He has averaged 26.5 points, 6.6 rebounds and 6.6 assists per game during his three years in Cleveland, winning Rookie of the Year honors for the 2003-04 season.
The deal reportedly begins after the 2007 season and runs through the 2010-11 season.
"I signed this extension for several reasons. First, it has been tremendous being close to my family and friends and playing with my Cavalier teammates," said James. "I'm extremely happy here and believe in my teammates, the coaches, and our management staff."