Collingwood's international career ended after he lost the Twenty20 captaincy following his retirement from Test cricket at the end of the Ashes and he had been the subject of a 28-day approach from Derbyshire in July, fuelling rumours that he may move on from the North East.
But having returned to form with Durham he said he was happy to stay at his home club.
"I'm a Durham lad through and through and I've really enjoyed being back in the dressing room with the guys," he said. "The club is ambitious and the quality of the team shows how committed we are to winning more silverware over the coming years and I want to be part of that - bringing more sporting success back to the North East."
Geoff Cook, the Durham coach, said, "We are delighted that Paul has decided to commit his future to Durham - he is a fantastic player with a great attitude and a real desire for the club to continue to move forward. He has consistently produced match-winning performances for us since his return to the side and to have him representing the club, on and off the field, is brilliant."
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