The agreement takes the New Zealand-born playmaker through until the end of the 2019 rugby World Cup in Japan.
The 28-year-old Cooper re-joined the Wallabies ahead of the Rugby Championship and started at flyhalf in last weekend's second Bledisloe Cup test defeat by the All Blacks in Wellington.
"For me, playing at the highest level for the Wallabies against the best teams in the world, week in, week out is the ultimate, and it will always be the pinnacle of our sport," he said in a statement on Thursday.
"We have a good opportunity in the coming weeks to put some of the hard work we've done into action, and I know my team mates and I are looking forward to the challenge that lies ahead."
Wallabies coach Michael Cheika said Cooper would bring his "trademark flair and X factor" to the team.
"But also, after his experience overseas, a wiser approach to the way he can lead the team around the field," he added.
"I really believe he will make a big impact on the game both for Queensland and for the national team.
Cooper has featured in the Wallabies' starting 15 in 46 of his 59 test appearances since his 2008 debut against Italy in Padova.
Australia, who lost both their opening Rugby Championship matches to New Zealand, play their next match of the tournament against South Africa in Brisbane on Sept. 10.
Cooper's return to the Reds, the team he helped guide to the 2011 Super Rugby championship, was also hailed at Ballymore after a miserable season boasting only three wins.
Cooper admitted to flirting with a contract at the Melbourne Rebels but said "coming home" was the right move for him.
"It's a massive part of my life. I've been through the low times and the good times at the Reds and I want to be part of putting them back on top."
(Reporting by Ian Ransom; Editing by Greg Stutchbury)
