Terms of the deal were not disclosed.
The 32-year-old former UConn guard is averaging 17.0 points and 5.8 assists this season and has led the Mercury to a WNBA-best 25-4 record. She helped Phoenix win championships in 2006 and 2009, was the 2009 league MVP and has won five scoring titles.
''Why would I ever want to play anywhere else?'' Taurasi said in a statement released by the team. ''As a person and a professional, I have a deep connection to this city and this organization. I am happy and feel really good about staying. ... There is no better place to play.''
In 330 regular-season games in 11 seasons with Phoenix, Taurasi has averaged 20.2 points and 4.3 assists. An all-WNBA first-team selection eight times, she led Connecticut to three NCAA championships and has helped the United States win three Olympic gold medals.
''Diana Taurasi isn't just the face of our franchise, she is the face of women's basketball,'' Mercury general manager Jim Pitman said in the team release. ''She is an example to young athletes everywhere - a fearless competitor, leader, and a consummate teammate with an unmatched drive to be the best.''