The new deal keeps the 23-year-old tied to the Kingsholm club until 2009.
Gloucester coach Dean Ryan told www.gloucesterrugby.co.uk: "When any club starts drawing up a shopping listÂ for the sort of individuals they want and a player of James' quality is out of contract, he will be top of that list.
"He is an outstanding talent, a player with an ability to become world class, and we are naturally delighted he has pledged his future to us.
"Ensuring James remained a Gloucester player has been a priority for us but these things take time. There was never a chance we would let him go - his record speaks for itself and we want him to be part of Gloucester's future."
Simpson-Daniel is one of the most highly-rated players in the Premiership and has eight caps for his England.
He joined the Cherry and Whites from Sedbergh School in 2000 and made a try-scoring senior debut against Rotherham a year later.
In 77 appearances in all competitions, he has scored 43 times - including 12 tries in 13 appearances this season. He will be hoping to add to that total in the upcoming RBS 6 Nations Championship for England.
Simpson-Daniel said: "I am thrilled everything has been sorted out because I simply couldn'tÂ envisage playing my rugby anywhere else.
"When this contract expires I will have been at the club for nine years and I want to be part of a team that is challenging for honours and winning things.
"I think this sort of contract shows a great deal of confidence in me because three years is a long time and now I have to knuckle down, work really hard at my game and try to improve.
"What Dean Ryan has said about me is really kind but the coaching staff have set the standards for all of us to follow. There is a great deal of respect in the environment we work in and now I want to try to repay that faith over the next few years.
"I am just delighted it has all been completed and hopefully now we can end the season strongly in the Challenge Cup and Guinness Premiership.
"My aim is also to try to realise my international ambitions and at Gloucester I am in a perfect place to make that happen."