The contract also includes two club options and takes effect at the start of the 2012 season, buying out the shortstop's final two years of arbitration eligibility.
"We love Yunel, we think he's one of the most talented shortstops in the game," said Blue Jays General Manager Alex Anthopoulos told MLB.com while traveling with the team in Cincinnati.
"The exciting thing for us, is this is a player that likes Toronto, wants to be in Toronto and we were able to come to terms on something that made sense for him and made sense for us."
Escobar has compiled a .281 average with eight home runs and 26 RBIs in 66 games this season, and is second among American League shortstops with a .359 on-base percentage.
The Blue Jays acquired the Cuba native along with pitcher Jo-Jo Reyes last July in a trade for shortstop Alex Gonzalez, pitcher Tim Collins and infielder Tyler Pastornicky.
Over his four-year career, Escobar is batting .288 with 41 homers and 225 RBIs in 572 games.