The news follows speculation about the world-class No10's future and illustrates the ambition of the West Wales region as they plan a move to a £23m new stadium complex next year.
It comes hot on the heels of new contracts for stars such as skipper Simon Easterby, Wales wing Mark Jones and former All Black Regan King.
Scarlets Director of Coaching Phil Davies, said: "Stephen's an iconic figure at the Llanelli Scarlets and is a renowned talent - we didn't want to lose him and worked very hard to ensure that his future was with us."
Stephen Jones said: "The Llanelli Scarlets mean an incredible amount to me. This is where I've played most of my rugby, the supporters are the best in the world and region has a fabulous future.
"It's been a privilege and a pleasure to play at Stradey Park and I'm desperately keen to help the region make the most of the new stadium and help the Scarlets develop further as the professional era evolves.
"The past few weeks have been interesting because there were some hugely tempting offers from other high-quality clubs. Now, however I'm happy to be settled and able to focus on winning silverware with the Scarlets this season and in the future."
Scarlets Chief Executive Stuart Gallacher added: "We're delighted that Stephen will be staying. He's enormously popular with fans and colleagues and I'm sure he'll play a pivotal part in future successes.
"Players of Stephen's calibre don't come along to often so, as a region, we put a great deal of effort into retaining his services."
"I know that the fans will be with us all the way and I commend their patience during what has been a difficult times."
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