The 36-year-old made his Bristol debut in 1989 and played at the club until 1992 when he moved to Bath.
The former Scotland international has also played for Glasgow before returning to the Memorial Stadium in the summer of 2003.
Bristol head coach Richard Hill said: "When I arrived here, it was literally Hilts and a bunch of kids. Without him that season, I really don't know how we would have fared.
"He's been the ultimate professional in his time here. He took a long hard look at himself several seasons ago and really started to look after himself.
"He's been in the best shape of his career recently which is why he has featured so much for us in the past four seasons.
"We've been in talks with Dave for some time now about next season.
"He feels he can still contribute and we can see him playing a part. I'm delighted he'll be around for a while longer yet."
Meanwhile centre Adam Powell has signed a new three-year contract with Guinness Premiership Saracens.
The 20-year-old has put pen to paper on a deal which will keep him with the club until 2010 - and comes in a season which has seen him make nine appearances and become a regular in the first team squad.
Powell is a former England Under-19 captain who is currently on international duty with England's Under-20 side as part of their RBS 6 Nations campaign.