"I didn't want to rush into things and I had to think through what was best for me," said Peel, who has been capped 41 times.
"It's always flattering to be linked with other clubs, but in the end I'm just happy to stay with Llanelli.
"It's the club I have grown up with and I'm just delighted to be staying for another two years.
"There were times when I thought about leaving but deep down this is where I want to stay. I'm happy with the environment here."
It is a big boost for the Scarlets as they prepare to move from Stradey Park to a new purpose-built stadium in the next 18 months, with director of rugby Gareth Jenkins pleased to see progress on and off the pitch.
He said: "We are going to a brand new stadium in a couple of years and to carry world class players into that environment is very important."
Scarlets chief executive Stuart Gallacher claimed he had always been confident of re-signing Peel despite the lure of big money contracts from England.
"We are delighted we have been able to secure Dwayne's contract for the next two years," he said.
"I have to say it has been a pleasure negotiating with Dwayne. It's been open, honest and fair, and I felt from the initial conversations that Dwayne's heart was here.
"Dwayne is a key component in the future of the Scarlets as he has proved in the Six Nations last season and the Lions tour. He is a world-class player.
"It's nothing but good news for us.
"His profile has risen so you have to expect interest in these type of players and it is part of the professional game."
Skipper Simon Easterby insisted the signing sent out a statement of intent by the Scarlets.
"It's fantastic. Dwayne has proved over the last year to 18 months he is one of the best scrum-halves in the world," said Easterby.
"And to have a player of his quality re-signing is a huge lift, not just for the club but for the players, and hopefully it will attract more quality players to the region.
"I think the club have put a real statement to the rest that they are prepared to keep hold of and sign the best.
"If we are going to compete at the top level in Europe then we are going to have to do that."
Peel is one of eight players the Scarlets have renewed contracts with.
As well as Peel, Mark Jones, Gareth Bowen, Gavin Thomas, Jonathan Mills and Adam Jones have penned new two-year contracts, Aled Gravelle has been contracted for three years and Garan Evans for another season.
"These re-signings give us the nucleus of a strong squad to move forward into our new home," said Gallacher.
"It is particularly pleasing that these players are excited about our future prospects."