The deal means the Finnish driver will continue to race for the reigning Constructors Champions in 2021.
Bottas heads into this weekend’s 70th Anniversary Grand Prix at Silverstone 30 points behind team-mate Lewis Hamilton in the driver standings.
While Hamilton’s future beyond this campaign is yet to be confirmed, it is expected that the six-time world champion will also remain with Mercedes.
“The past few years have been all about continuous improvement, working on every aspect of my performance,” said Bottas, who joined Mercedes from Williams in 2017.
“I’m confident that today I’m the strongest I’ve ever been, but I can always raise the bar,” Bottas continued.
“Ever since I fell in love with F1 as a kid, it’s been my dream to one day become world champion.
“I’m in the fight for the title this year and staying with Mercedes puts me in the best possible position to compete for it next season as well.”
Bottas won this year's season-opening Austrian Grand Prix, while team-mate Hamilton has finished first in the three races since.
Bottas finished second in Styria and third in Hungary before a late tyre issue at Silverstone last weekend saw him drop to 11th on the day.
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