The new deal will see the Finn -- who sits in third in the drivers' championship on 197 points -- continue to drive for the Silver Arrows in the 2018 season.
"I am honored and proud to continue to work with Mercedes and to remain part of the Mercedes family," Bottas said in a statement.
"Together, we continue to grow stronger day by day, and by keeping up our hard work I believe the sky is the limit. Since joining the team in January, I've enjoyed every day working with them.
"The welcome and the support from every team member and all the fans has been invaluable. As a driver, I've been able to learn and grow massively, and we have already enjoyed some really good moments this season that I will never forget."
In just 13 races, Bottas has delivered nine podiums for Mercedes, the same amount he managed in four years with previous team Williams.
The 28-year-old was signed as a last-minute replacement by Mercedes for reigning F1 champion Nico Rosberg, who announced his shock retirement less than a week after winning his maiden title.
"We gave Valtteri a big challenge this year: joining the team at the eleventh hour, stepping up to the forefront of F1 and pairing with the sport's best driver as his teammate," said Mercedes executive director Toto Wolff, referring to Lewis Hamilton, who currently leads the drivers' championship.
"With that in mind, his results have been probably even more impressive," added Wolff. "There have been ups and downs -- more ups, fewer downs -- and some great highlights like his two race wins in Russian and Austria.
"Overall, the balance of his performances and his upward trajectory made it a no-brainer for us to continue with him into 2018."
Rosberg and Hamilton drew criticism last season for their often tetchy relationship, which included a collision on the final lap of the Austrian Grand Prix.
However, both Bottas and Wolff highlighted the impressive working partnership that the pair have built in their opening nine months together.
"For our team, the bonus factors are the respect and sportsmanship that have grown between our two drivers," Wolff said.
"The chemistry and dynamic between Valtteri and Lewis work and are what we need to take the fight to our competitors."
Bottas, meanwhile, said he is "enjoying the respect" he has with Hamilton and their mutual "will to push this team forward together."