The 32-year-old Greece midfielder has spent most of his career at the Athens club, apart from 2003 to 2007 when he enjoyed stints with Inter and Benfica.
"After the current development I will finish my career at Panathinaikos, the team where I started out, and for this I am very happy," Karagounis told the club website.
Karagounis was a member of the Greek squad that won Euro 2004 and has scored six times in 85 internationals.
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