"I am very satisfied with this decision, because it has always been my plan to compete in motorsports for as long as I can be competitive and find it enjoyable at the same time," added the rider, who turned 37 last month.
Rossi, whose Spanish team mate Jorge Lorenzo is the reigning world champion, starts the season in Qatar this weekend aiming to repeat last year's victory under the Losail floodlights.
The Italian boasts the longest winning career in grand prix history with a span of 19 years between his first triumph in 1996 in the 125cc category and his most recent MotoGP victory in Britain in August of last year.
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The most popular rider on the grid, rated by many as the greatest of all time, Rossi has won seven titles in the top category and finished runner-up last year with four wins and 15 podium appearances.
He has won four of his MotoGP titles with Yamaha, the team he rejoined in 2013 after two difficult seasons at Ducati, and 53 of his 86 wins in that category with the Japanese manufacturer.
In total, from all categories of grand prix racing, Rossi has racked up 112 race wins -- second only to his great compatriot Giacomo Agostini, who took 122 victories between 1964 and 1977.
He won the 125cc and 250cc titles with Aprilia before taking his first three in the top class with Honda.
"I believe the confirmation of the extension with Valentino will be music to the ears of Yamaha fans and MotoGP fans around the world," said Yamaha Motor Racing managing director Lin Jarvis in the statement.
"I cannot think of a better way to start a new season than for both parties to make this strong commitment.
"When Vale returned home in 2013 it was 'a decision for life'. This new agreement confirms that Vale will indeed finish his motorcycle racing career with Yamaha."
(Reporting by Alan Baldwin in London, editing by Peter Rutherford)
