Germany's Bild newspaper reported the deal was worth 55 million ($85.3 million) until 2017.
The deal is a no-brainer for Mercedes. Three of Rosberg's six victories with the team have come this season.
And it is good news for Hamilton, too. He and Rosberg have raced one another since they were kids in karting and each knows the other's strengths and weaknesses.
Despite reports to the contrary, they work well together on a professional level despite the odd spat when tensions have risen this year, notably in Monaco.
They are not close friends, but the continuity of their partnership has high value for a team which has the strongest driver pairing in F1.
"I'm very proud to drive the Formula One Silver Arrow of the modern era," Rosberg said of his new deal.
"As a German, the heritage of Mercedes-Benz is very special for me. We have an awesome team and I am confident that we have the right people at every level. I'm looking forward to the next years together."
The 29-year-old from Wiesbaden joined the team when Mercedes returned to F1 in 2010.
Always a difficult driver to quantify because of teammates such as Kazuki Nakajima and Alexander Wurz at Williams, Rosberg showed well against Michael Schumacher and overshadowed the multiple champion in the team at the end of his career. When Mercedes won in China in 2012, Rosberg was at the wheel.
Last year, when Hamilton replaced Schumacher, Rosberg won two races to the Briton's one. As the circus warms up for Hockenheim, Hamilton has five wins to Rosberg's three this season.
But Rosberg has led the title chase almost throughout the opening nine races and has firmly established his credentials with his performances against the fastest racer in the business.
The head of Mercedes-Benz Motorsport, Toto Wolff, outlined why Rosberg is such an important part of the team strategy.
"Nico has been part of the Silver Arrows project since day one and he has a big stake in the development of the team since 2010," Wolff said.
"His speed, commitment and focus have all helped to give clear direction and to drive the team forward." AAP / The Independent
F1 points after nine races
1. Nico Rosberg - 165
2. Lewis Hamilton - 161
3. Daniel Ricciardo - 98
4. Fernando Alonso - 87
5. Valtteri Bottas - 73
6. Sebastien Vettel - 70
7. Nico Hulkenberg - 63
8. Jenson Button - 55