The 32-year-old has been on a season-long loan at the Saint Mary’s stadium this term from Everton but his contract with the Toffees expires at the end of the season.
Ralph Hasenhuttl’s side have opted to keep Walcott for the next two seasons.
Walcott began his career with the Saints before moving to Arsenal, where he spent 12 years.
Walcott has made 23 appearances for Southampton this season, scoring three goals.
"I'm not sure I can properly express how happy I am about this," said Walcott, who has 47 England caps.
"Southampton is a club that means so much to me, and it has been incredibly special for me to have spent this season back at St Mary's. But to now have the opportunity to return for a further two years means such a great deal to me, both personally and professionally.
"I would like to say a huge thank you to the club, my teammates and the fans for making me feel so welcome back here, and I can't wait to continue pulling on the shirt in the next couple of seasons. Hopefully in that time we can make a few more special memories too.
"I would also like to say thank you to everyone at Everton, who have been so good to me throughout my time with the club, and I wish them every success in the future."
Southampton manager Hasenhuttl added: "Theo has been a very good influence for us this season.
"He is a very professional player who does things in the right way and has a very positive impact not only on our young players but on the dressing room as a whole."
