Renault completed their 2017 lineup, and another part of the driver market puzzle, by announcing ahead of the season's penultimate Brazilian Grand Prix that Palmer, 25, would be staying put.
The British-based manufacturer team have already signed experienced German Nico Hulkenberg from Force India and the second seat had looked like a toss-up between Palmer or Magnussen.
Magnussen, 24, pre-empted that by turning down a one-year offer in favour of a longer-term opportunity at Ferrari-powered newcomers Haas in place of Mexican Esteban Gutierrez, a source close to that deal told Reuters.
Renault said the combination of Palmer and Hulkenberg offered "a very promising driving force to meet our goals.
"Jolyon understands the team’s spirit and motivates everyone he works with," said Renault Sport chairman Jerome Stoll. "The lineup of Jolyon and Nico harnesses the benefits of continuity and fresh blood.
"I am sure that having Nico as a team mate will help push Jolyon to greater achievements."
Palmer, a former GP2 champion, said he was "over the moon" and eager to reward the team's faith in him.
"For me, it’s been a steep learning curve driving in Formula One and I know that I am performing better than ever, and that there’s still more to come," he said.
Renault thanked Magnussen, who made his debut with McLaren in 2014 and was a reserve with that team last year before Renault signed him in January, for his contribution.
Haas, eighth overall in the championship and one place ahead of Renault, this season became the first U.S.-owned team in 30 years.
French driver Romain Grosjean has scored all their points, however, with Gutierrez saying last month that he was exploring other options.
Magnussen has scored seven points for Renault from 19 races compared to one for Palmer, who was signed by the team when they were still known as Lotus, and has also out-qualified the Briton 12 times to seven.
With Renault and Haas finalising their lineups, there remains a vacancy at Force India, currently fourth overall, while struggling Sauber and Manor have yet to confirm their drivers.
Manor rookie Esteban Ocon is seen as a contender for Force India, with the team's engine providers Mercedes having the Frenchman under contract, but Sauber's Brazilian Felipe Nasr could also be in the frame.
Gutierrez was previously at Sauber but a return there looks unlikely.
(Editing by Ken Ferris and Toby Davis)
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