Since then he has gone on to win 82 caps for his country and represent Munster on 127 occasions.
Ireland head coach Declan Kidney said: "It is a very strong message when you have a player of Paul's standing opting to continue playing in Ireland with Munster.
"Paul has been a very important player and leader for both Ireland and Munster during his career and I am especially pleased that he has come back so strongly after his injury troubles."
The second row's Munster career has seen him win two Heineken Cups, one as captain, as well as two Magners League titles and a Celtic Cup.
His senior international career has seen him selected for three Rugby World Cup squads in 2003, 2007 and 2011 and the Limerick man was part of the sides that won five Triple crowns, one Six Nations title and Ireland's second ever Grand Slam in 2009.
He has also represented the British & Irish Lions on two tours, to New Zealand in 2006 and as captain to South Africa in 2011.
Commenting on the new deal himself, O'Connell admitted: "I have been lucky over the last ten years to play with a team like Munster which has such phenomenal support and I have enjoyed a lot of success during that time.
"So much has changed since my first games for Munster and Ireland, with Heineken Cup and Grand Slam wins, brand new stadiums and having the opportunity to play with so many good players, that it was always a very easy decision to remain in my home province."
Speaking about the future, he added: "I am feeling really good both mentally and physically, which in part goes down to how well we are looked after here in Ireland.
"So I am looking forward to the remainder of this season and beyond and doing all I can to help make Munster and Ireland as successful as possible."
Commenting on the announcement, IRFU Chief Executive Philip Browne said: "The retention and development of Irish players is one of the top priorities for Irish rugby to ensure continually competitive teams at provincial and international level.
"Paul O'Connell is a prime example of this and I am delighted that he has further committed himself to Munster Rugby and the IRFU.
"He has done so much to contribute to the success of the Munster and Ireland teams during his career and is a shining example for younger players."
Munster head coach Tony McGahan said: "I'm of course delighted that Paul has agreed an extension to his contract that sees him remain with Munster for the next two seasons.
"He's an integral part of the squad whose influence goes way beyond his on-field performances. He is a leader both on and off the field, a quality recognised by his recent appointment as Irish captain and the perfect role model for those who aspire to play professional rugby."
Born: October 20, 1979
Debut: v Wales 03/02/2002
Debut: v Edinburgh 17/08/2001
British & Irish Lions
Debut: v Bay of Plenty 04/06/2005
Appearances: 11 (3 Tests v New Zealand in 2005, 3 Tests v South Africa in 2009 as captain)