Neto’s new contract will see him remain at the Molineux Stadium until the summer of 2027.
The Portugal international has recently returned from a long-term knee injury suffered in April last year.
Neto joined Wolves from Braga in the summer of 2019 and has made 83 appearances in his time at the club, scoring ten goals.
Wolves technical director Scott Sellars told the club's website: 'It's great news for the football club and Pedro. It's a deserved reward for him, he's returned from injury and put in a lot of hard work to get back, so it's good for all parties.
'It's a no-brainer for the club to retain its talent and hopefully it was a no-brainer for Pedro to stay longer and work hard in an environment he's comfortable and happy in. Pedro deserves it and we're really happy.'
'It was difficult for him, he had a setback along the way, but as Pedro always does, he got his head down and worked hard with a smile on his face.
'He's committed to being the best he can be and that shows with how quickly he's got back into his groove, but we think there's a lot more to come.
'He's been out for a long time, but we've got no doubt he'll be back to the Pedro we know, whether that's towards the end of the season or the start of the next one, there's no rush. We just want to make sure he has minutes and is developing.'
Neto added: “I’m very happy because it’s felt like home here and I want to continue here. I’m very pleased because I feel very good here, it was three years ago I arrived and I’m very happy.
“I want to work a lot to conquer things with this club because we have the potential to do this kind of stuff. We are working better and better, and I hope to conquer things.”
