"BVB, with its unbelievable fans, has really grown very dear to me," Kagawa said in a statement on the club website.
"I am very glad that I will remain a part of this incredible club in one of the best leagues in the world with the highest viewing figures."
Kagawa has scored 36 goals in 127 Bundesliga matches for Dortmund with a further 33 assists. He has scored another 18 goals in European competition and the German Cup combined.
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He has won two Bundesliga titles and two German Cups, including last season's 2-1 victory over Eintracht Frankfurt.
"We are really happy that Shinji will continue to play for us in the coming three years," Dortmund sporting director Michael Zorc said.
"And as one of the more experienced members of the squad, he is an unbelievably important anchor in a team which is very youthful overall."
Dortmund finished third in the Bundesliga last season, 18 points behind title winners Bayern Munich, earning them direct entry into the Champions League group stage.
(Reporting by Sudipto Ganguly in Mumbai; Editing by John O'Brien)
