Donovan would be allowed to go away on a short-term loan and it was likely that he would head to Everton in England's Premier League, said Galaxy coach Bruce Arena.
A deal with Everton, however, had not yet been finalised, said Arena, adding that any loan would end by the Galaxy's MLS season-opener on March 27 at home against New England.
"At the end of the day, after a lot of thinking, a lot of soul-searching, this is the place I want to be," the 27-year-old Donovan told a Galaxy news conference.
Donovan, a member of the U.S. national team and a team mate of David Beckham on the Galaxy, said he also wanted to play abroad.
"I'm very grateful to Bruce for allowing me the opportunity to also do something that I'm passionate about - which is have the ability to go on loan and go play in some of the best leagues in the world," said the forward.
"I'm fortunate. Most soccer players don't get this opportunity to have the best of both worlds. It's incredible."
The Galaxy have improved dramatically in recent years and Donovan said that was a key reason he decided to stay. Los Angeles reached the MLS Cup this season but fell to Real Salt Lake in a penalty shootout following a 1-1 draw.
"Candidly, a year ago I wouldn't have made this decision," said Donovan, a Los Angeles native.
"I believe in this team. I believe in its future. I'm proud to be a part of this team."
