Carter enhanced his reputation in 2005 with two stellar performances against the Lions in which he scored 44 points.
"This has been an incredibly important decision for me personally and I have received some significant offers to play overseas which were both flattering and tempting," said Carter.
"But in the end the overriding factor for me was the All Blacks jersey."
Current All Blacks coach and former Wales and Lions boss Graham Henry was delighted to secure the services of one of his brightest stars.
"Daniel is the best player in the world in his position, one of the best to have ever worn the All Blacks jersey and the vice-captain and on-field navigator of the All Blacks," said Henry.
"He is a tremendous ambassador for the All Blacks and our national game and fans both here in New Zealand and overseas will be celebrating his re-signing."
The option to take an extended sabbatical from New Zealand has been written into Carter's contract, opening the door to a short-term move overseas.
"We are absolutely delighted Dan has chosen to continue his career in New Zealand and we have the utmost respect for him, knowing he had some serious options to consider," said NZRU CEO Steve Tew.
"We believe that the contract is a reflection of the high standing that Dan has in the game both here and overseas. We have been very flexible in our approach, which again shows how important we think Dan is to the All Blacks and New Zealand rugby.
"As an example, we have built in options for Dan to take an extended break from the game if he so wishes, whether that's to take a break from rugby or play overseas, and he will discuss that with us at the right time."
Since making his All Blacks debut in 2003, Carter has racked up 79 Tests and a staggering 1,188 points to make him the second highest points-scorer in international rugby.