Hunter, 31, has been in the Twins organization since Minnesota drafted him in the first round of the 1993 draft. He hit .278 with 31 homes runs and 98 runs batted in over 147 games in 2006, running his 10-year Major League statistics to a .269 batting average, 164 homes runs and 604 RBI.
He has also won five consecutive Gold Gloves for his play in the outfield.
"This is a very happy day for me and my family," said Hunter. "I know I am going to be back in Minnesota for at least one more year and I am going to enjoy it.
"Hopefully we can put together another championship season in 2007 and bring a World Series title back to Minnesota."