The 75-year-old was re-appointed on a short-term basis in March following the sacking of Patrick Vieira, who had replaced his predecessor and eventual successor in the summer of 2021.
Vieira failed to win any of his final 12 games in charge of Palace, who went scoreless in their last four matches of the Frenchman's reign, but Hodgson oversaw an immediate upturn in fortunes.
Under the veteran Englishman, Palace vastly improved on the attacking front, winning three games on the spin against Leicester City, Leeds United and Southampton before subsequent triumphs against West Ham United and Bournemouth.
Hodgson drew another three and lost just two of his 10 games in charge, ultimately helping the Eagles stave off relegation to the Championship with an 11th-placed finish in the Premier League, ending the campaign one place better off than London rivals Chelsea.
The former Liverpool and England boss was originally expected to depart at the end of the season as Palace searched for fresh blood, but he has instead committed the next 12 months of his career to Palace.
"I am immensely pleased and proud to be extending my time at Crystal Palace, and I would like to thank the Chairman and Sporting Director for their continued faith in me," Hodgson told the official Crystal Palace website.
"I know what a fantastic squad we have here. It's a great blend of youth and potential, alongside experienced players with Premier League and international pedigree.
"I have spoken with the Chairman at length and we agreed that we must be ambitious in getting the most out of such talent. As such, we have set ourselves the target of a top-half finish, which we believe is eminently achievable with such a fabulous group of players and the most magnificent supporters who get behind the team, week in, week out."
Eagles chairman Steve Parish added: "Roy's record as manager speaks for itself. His return earlier this year along with Ray Lewington and assisted ably by Paddy McCarthy produced a fantastic return both in results and producing some stylish performances, helping us climb the table and get international recognition for our players.
"Appointing Roy for another season will enable him and the squad to hit the ground running for a full pre-season and continue the magnificent momentum that has built up since his return."
More to follow.