Bucks General Manager John Hammond didn't reveal the terms, but the Milwaukee Journal-Sentinel reported the extension is for four years at a total of $44 million.
Sanders, 24, showed marked improvement last season, posting career-high per-game averages of 9.8 points, 9.5 rebounds and 2.8 blocks in 71 games.
The Virginia Commonwealth product, who's listed at 6-foot-11, 235 pounds, was set to enter the final season of his four-year rookie contract.
"By combining his God-given ability with hard work and determination, Larry has developed into one of the top young defensive players in the league," Hammond said. "He is a very important part of what we are doing in Milwaukee, and we're excited to announce his contract extension."
Sanders, taken by the Bucks with the 15th-overall pick in 2010 draft, registered a team-leading 26 double-doubles in 2012-13.