"It seems so long ago since my Leicester days and I like to think I have moved on to bigger and better things," said Balding.
"I am so pleased with how everything is going and just glad I have the chance to play my part in Gloucester's future for another two years.
"My ambition is to push myself even harder and to play a big part in the team during 2006."
Balding, 27, made an immediate impact last year and was appointed club captain in the summer, only to fracture his cheekbone in three places in Gloucester's opening game of the season against Worcester.
He returned to first team action in November and is an important part of Dean Ryan's plans for the future.
"Adam is one of our senior players and it is great to secure him to the club long-term," said the Gloucester head coach.
"He is a player who leads by example, is supremely competitive and is somebody we want to work with for a long time. I am really pleased it has been concluded so quickly.
"To have someone of Adam's ability at the club is a major boost for us."