The former England boss went on to lift the club well clear of relegation before ending the season in 11th place.
"I am delighted to have extended my contract with Crystal Palace," Hodgson said in a statement on Friday.
"It is a club that has been close to my heart since I was a youngster growing up in the borough of Croydon, and having stood on the terraces in the 1950s, it is a wonderful thing to be managing my boyhood club all these years later.
"We can be proud of our achievements last season in turning things around despite a poor start, but this year we want to ensure we don't endure the same struggles."
Ahead of Palace's league opener against newcomers Fulham, Hodgson said his club has been successful in plugging gaps in the squad despite operating with a limited budget.
Cheikhou Kouyate arrived from West Ham United, goalkeeper Vicente Guaita and German midfielder Max Meyer joined on a free transfer, while forward Jordan Ayew arrived on loan from Swansea City on deadline day.
"Everyone at the club has worked hard. This time we've been very successful," Hodgson told reporters.
"Don't forget we've spent a lot in the previous ones. We've looked at our situation and examined what we've got and what we needed to do."
Hodgson confirmed Meyer will have to wait for his Premier League debut as he is still in the early stages building his fitness levels for the new campaign.
"He's (Meyer) a naturally fit player but he's had no pre-season," he said.
"We want to bring his match fitness level up to a better level. Hopefully we can organise a match next week to play. I can't put a timescale on when he'll be fit to play."
(Reporting by Hardik Vyas in Bengaluru; Editing by Christian Radnedge)
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