The 30-year-old Briton, who won the Tour in 2013 and 2015, said it was a "very easy decision".
"I've been part of the team since its inception in 2010 and that's a special feeling," he told BBC Sport.
"This is beginning to feel like a family. This year the guys mean business. It feels like it will be a good season."
Froome is the only Briton to win the Tour twice.
Team Sky boss Sir Dave Brailsford added: "It's fantastic. I'm really pleased. He's a fantastic athlete.
"He's been the backbone of the team and will be the leader going forward for many years. I was trying to avoid discussions being a huge distraction during big events in the final year of his contract."
Two-time Tour de France champion Chris Froome has extended his contract with Team Sky until the end of 2018.