The maverick playmaker was fined A$40,000 in October after describing the Wallabies camp as "a toxic environment" that was "destroying" him.
Cooper then rejected the ARU's initial contract offer, reported to be a pay-as-you-play deal, and threatened to walk away from the game.
But he has ended the speculation by commiting his future to the Gold and Green until at least 2014.
"This means Quade Cooper and the Reds can now focus entirely on the upcoming 2013 Super Rugby season," said Acting ARU CEO Matt Carroll.
"Quade can now look forward to getting back on the field next year and playing for the Reds and in turn stake his claim for re-selection in the Qantas Wallabies squad.
"Next year is an exciting year for Australian Rugby with the British & Irish Lions venturing to our shores for the first time since 2001.
"Agreeing to terms for a further two years provides Quade with an opportunity to take on one of the world's most iconic Rugby teams.
"It is an opportunity I am sure he is looking forward to as a Reds player and potentially as a Qantas Wallaby."
Cooper is currently sidelined with a knee injury but will return to action in the Reds Super Rugby campaign.
Their pre-season schedule kicks off against the Blues on February 2 and just six days later he is set to make his professional boxing debut on the undercard of Sonny Bill Williams' clash with Francois Botha.
"It's no secret that I have a strong passion and desire to represent Queensland and Australia. I love playing for the Reds and the Wallabies," said Cooper.
"It's a great feeling to know that things are sorted and now I can continue to improve as a player and as a member of the Queensland Reds and the Wallabies.
"I'm confident I'll front for round one in peak physical condition and primed to play the best rugby in my career."
Since making his debut against Italy in 2008, Cooper has established himself as one of the most exciting players in the fame. He has amassed 38 Test caps and helped the Reds to the Super Rugby title in 2011.
Cooper follows in the footsteps of Reds and Wallabies teammate Will Genia by re-committing ahead of the Lions tour.
And Lions head coach Warren Gatland, who takes his famous tourists Down Under next June, reckons the 24-year-old is a world class talent.
"When he's good he's very good, and when he's bad, he's just as bad as well," added Gatland.
"At times they've tried to hide him defensively at fullback, and done different things. But when he's on his game, he's world class."