The contract ties Duncan to the defending champion Spurs through the 2011-2012 season.
Duncan, 31, has twice been named the NBA's most valuable player and has been the NBA Finals MVP three times.
"Tim Duncan has established himself as one of the best players in NBA history," San Antonio Coach Gregg Popovich said. "Despite the individual accolades he has attained, what makes him truly great is his dedication to his team.
"He is the ultimate teammate. He is an unselfish superstar who loves to compete and has only one goal when he steps on the court -- to do whatever it takes to help his team win."