The 34-year-old Warwickshire captain has played 118 Test matches, scoring 7,727 runs at an average of 42.69, but last represented his country in 2015.
Bell, who has 18,533 runs in first-class cricket, is still ambitious to regain his England Test place.
He said he was "thrilled" to sign a new contract with the club he first joined as a 10-year-old.
"Warwickshire is the only county that I've ever wanted to play for," he added.
"The club has played a huge role in my career and it's a great honour to now captain the team and help our young, talented players fulfil their potential here at Edgbaston."
Bell has been part of an Ashes-winning team on five occasions, helping England win the urn in 2005, 2009, 2010-11, 2013 and 2015.
He has played in a total of seven series against the Australians, having also been a part of the touring side in 2006/07 and 2013/14.
In domestic cricket, Bell has won six trophies, including captaining the Bears to success in last summer's Royal London One-Day Cup in his first season as skipper.
He is the most capped international cricketer in Warwickshire's history, having played 161 one-day internationals and eight T20 matches for England, in addition to his 118 Test appearances.
Warwickshire sport director Ashley Giles said: "Ian is a true Bear who has been with Warwickshire since the age of 10 and has gone on to be one of the most decorated players in the club's history.
"He continues to be one of the leading batsmen in the country across all three formats and, as our captain, he sets exceptionally high standards for the rest of the squad."

Pentagon spokesman Colonel Dave Lapan said there was no evidence to back up Iranian claims that it had shot down "Western spy drones".
Another US official told Reuters news agency that drones had in the past gone down in the Gulf, but that the cause had always been mechanical failure.
There has been no independent corroboration of the Iranian claim.
The head of the Revolutionary Guards' air force wing, Amir Ali Hajizadeh, said on Sunday that two "Western spy drones" had been shot down in the Gulf.
He said "many" other unmanned aerial vehicles (UAVs) had been shot down over an unspecified period but that this was the first time it had been reported.
But Col Lapan said there were "no recent reports that would corroborate what the Revolutionary Guard said about unmanned aerial vehicles".
The second official, speaking to Reuters on condition on anonymity, said one drone had crashed in the Gulf in early 2009 because of mechanical failings, but landed in international waters.
"We have had cases in which UAVs have gone down in the Gulf ... but I don't have any indication (of a case) where a UAV has been taken down by hostile fire in the Gulf," the official said.
The Revolutionary Guards were set up following the Islamic revolution in 1979, and its commanders have frequently delivered warnings to Israel.
Last August Iran unveiled what it said was its first domestically built drone, the Karrar.
It said it had a range of 1,000km (620 miles) and could carry two 250-pound (115kg) bombs, or a precision bomb of 500 pounds.
The Fifth Fleet of the US navy is based in Bahrain, on the other side of the Gulf from Iran.
Iranian commanders have threatened to block shipping through the strategic Strait of Hormuz if it is attacked.
England batsman Ian Bell has signed a new deal with Warwickshire which runs until the end of the 2020 season.
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The US has denied that any of its unmanned spy planes have been shot down by Iran.