Williams, 26, turned his back on overseas offers, but shifted clubs after a tumultuous season with the Blues.
All Blacks coach Graham Henry said: "Ali is a world-class player, and his decision to continue his career here is fantastic news for New Zealand and New Zealand rugby.
"He has proven his ability at all levels of the game - from provincial rugby to the Test arena and I am sure that he will continue to make a valuable contribution to the teams that he plays for over the next couple of years."
The second rower heads south after blotting his copy book with the Blues hierarchy in 2007, a year when he encountered fitness, selection and disciplinary issues.
He has joined the Makos to ensure a place in the Crusaders franchise catchment area for the 2008 season. The Crusaders are based in Christchurch.
Williams will likely replace Saracens-bound All Blacks team-mate Chris Jack in the six-time champions' tight five.