The Reds skipper is targetting a return to the Wallaby set-up after he missed the vast majority of last season with a knee injury.
Horwill made his Test debut against Fiji in 2007 and ended the 2009 international season with 24 Test appearances to his name having started every one of the Wallabies' Test matches in that season.
Horwill has enjoyed an encouraging return to action this season and has lead the Reds to the top of the Super Rugby table.
The 26-year-old will remain a Red until at least the end of 2013 and will be a front-runner to face the Lions, who tour Australia in the same year.
"I didn't want to play anywhere else and I didn't look anywhere else. This is where I want to play my footy and I'm thrilled everything has now been sorted," said Horwill.
"We've got a great environment here, not only on the field but off it. We're building something special and I hope we can keep the group together as much as possible."
Queensland Rugby CEO Jim Carmichael was delighted to secure the services of his inspirational leader for another two seasons.
"James is an outstanding young man and we were determined to retain him because of his attitude, his ability and his dedication to this State added Carmichael.
"We recognise that the team looks to him for leadership and direction and we have moved to harness that for the betterment of the Code.
"It is our aim to retain a major percentage of the talent that we currently have in our ranks. Getting James to re-sign was our highest priority. His leadership off the field will also be enhanced with his appointment as Players Representative on the Queensland Rugby Union Board."