The Ireland and British & Irish Lions international has become an increasingly influential member of his national side since making his debut against Wales in 2002, and the decision to stay in Ireland is a major boost for Irish rugby.
He is also an integral part of the Munster team, having made his debut for the province in 2001 and winning 60 caps since then.
The 26-year-old, who has won 31 caps for his country, admitted the decision to sign had been a relatively straightforward one.
"It wasn't a difficult decision really," he said.
"When you consider the players we (Munster) have, consider their work ethic and ambition, I don't think you would find anything comparable at another club.
"Besides that I'm very happy with the coaching set-up we have. All things considered I'm delighted and just looking forward to getting on with the job of helping Munster and Ireland achieve the goals we've set for ourselves."
Munster chief executive Garrett Fitzgerald said: "We are really pleased that a player of Paul's stature has committed himself to Munster for the next few years.
"It is tremendous news for us and a great boost coming at a time when we face into the latter stages of the Celtic League and Heineken Cup."