The talented lock represented both Munster and Ireland Schools before winning an Under-19 World Championship title with Ireland alongside current senior team members, Brian O'Driscoll and Paddy Wallace.
His senior international career has seen him selected for two Rugby World Cup squads in 2003 and 2007. He was part of the sides that won five Triple Crowns, one RBS Six Nations Championship title and Ireland's second ever Grand Slam in 2009.
His Munster career has seen him win two Heineken Cups, two Magners League titles as well as a Celtic Cup.
Commenting on the announcement, Ireland head coach Declan Kidney said: "It is very important that we continue to retain players of the caliber of Donncha in Ireland and I am delighted that he has made the decision to remain here.
"I have had the pleasure to work with Donncha through many years of his career and seen him develop into the top class player that he is now.
"His professionalism and work ethic is second to none to the point where he is highly respected by coaches, players, opposition and supporters in equal measure."
O'Callaghan himself said: "As players we are so well looked after by both the national and provincial management teams and I feel incredibly privileged to be able to play the sport I love for both Munster and Ireland.
"Munster is my home province and the decision to continue my career here was an easy one when you consider the standard of players in the squad and the incredible support I have received from both the fans and my family.
"My focus now is to try and perform as well as I can to help Munster and Ireland to be successful."
IRFU Chief Executive Philip Browne commented: "It has always been the Union's desire to keep our best players within the provincial teams so as to allow us to monitor their development.
"In an increasingly aggressive market place with overseas clubs constantly looking to take players out of Ireland, their retention is one of our top priorities."
Munster head coach Tony McGahan added: "We're obviously delighted that Donncha has agreed an extension of his contract. I believe it's a massive boost for Munster given the strong interest there was in him from overseas clubs with far greater financial resources than Munster.
"He's a hugely ambitious, competitive character and I think this sends a clear message concerning that ambition and where it will be best served. Here in Ireland with Munster.
"I think it's also a very encouraging sign for younger players to see a player of his calibre and universal appeal showing the loyalty and commitment he has done by agreeing this new deal. I look forward continuing to work with him. This is certainly good news for Munster Rugby."
DONNCHA O'CALLAGHAN - CAREER DETAILS:
Born: March 24, 1979
Debut: v Wales, March 22, 2003
Debut: v Ulster September 4, 1998
British & Irish Lions Career
Debut: v Argentina, May 23, 2005
Appearances: 12 (2 Tests v New Zealand in 2005, 1 Test v South Africa in 2009)