The talented 19-year-old Germany international, considered one of the best prospects in Europe, has been at Dortmund for a decade and big European clubs have been circling in recent months eager to snatch him away. His previous contract ran until 2014.
Among those who had publicly stated an interest are Arsenal, while several other English and Spanish clubs were reportedly after the player, who has won 12 caps and scored two goals for Germany.
"Everyone knows how I feel in Dortmund," said the midfielder, who is due to return to action early next month from a groin injury that has kept him out for more than two months.
"I want to be part of this team's development," he said.
The German club have already signed longer deals with a string of their young players, including Germany defenders Mats Hummels and Marcel Schmelzer and Serbia international Neven Subotic.
Gotze's decision to commit to Dortmund is expected to influence other players' decisions on staying at the club.
"We are delighted to be able to take a further step into the future with Mario," said club manager Michael Zorc.
Borussia are on course for their second consecutive Bundesliga title and are five points clear of second-placed Bayern Munich at the top of the table. They have also reached May's German Cup final where they will face Bayern.
