Hodgson returned to Selhurst Park on a short-term contract back in March after Crystal Palace were dragged into the relegation dogfight under Patrick Vieira.
The former England and Finland manager masterminded a quick turnaround that saw Palace steer well clear of the relegation places with 18 points amassed from his 10 games in charge.
The Eagles would eventually finish 11th and Hodgson has accepted an offer to remain in charge for the 2023/2024 season.
Hodgson was previously in charge of Palace for four years but stepped down in the summer of 2021.
“I am immensely pleased and proud to be extending my time at Crystal Palace, and I would like to thank the chairman and sporting director for their continued faith in me,” Hodgson told the official club website.
“I know what a fantastic squad we have here. It’s a great blend of youth and potential, alongside experienced players with Premier League and international pedigree.
“I have spoken with the chairman at length and we agreed that we must be ambitious in getting the most out of such talent.
“As such, we have set ourselves the target of a top-half finish, which we believe is eminently achievable with such a fabulous group of players and the most magnificent supporters who get behind the team, week in, week out.”
Palace chairman Steve Parish said: “Roy’s record as manager speaks for itself.
“His return earlier this year along with Ray Lewington and assisted ably by Paddy McCarthy produced a fantastic return both in results and producing some stylish performances, helping us climb the table and get international recognition for our players.
“Appointing Roy for another season will enable him and the squad to hit the ground running for a full pre-season and continue the magnificent momentum that has built up since his return.”
The 75-year-old counts Inter Milan, Fulham and Liverpool among his former clubs.
