The German joined Mercedes when they returned to the sport as a fully-fledged manufacturer in 2010 and has since gone on to score six wins, eight pole positions and 17 podiums for the Brackley-based squad.
"I am very proud to drive the Formula One Silver Arrow of the modern era,” Rosberg said. “As a German, the heritage of Mercedes-Benz is very special for me, and I am proud to be able to represent the best car brand around the world.
“It has been a difficult road to get to where we are now - but everybody kept believing and, thanks to the fantastic support from Mercedes-Benz, we are now leading the way in F1. There has been big progress during the past year, building up our structure, management and capability for the future.
“We have an awesome team and I am confident that we have the right people in place at every level. I'm looking forward to the next years together, when we will keep pushing to win even more races - and, hopefully, championships."
Toto Wolff, the head of Mercedes-Benz motorsport, hailed Rosberg’s contribution to the team and said that his contract extension would provide the team with a solid base moving forwards.
"Nico has been part of the Silver Arrows project since day one and he has a big stake in the development of the team since 2010," Wolff said. "His speed, commitment and focus have all helped to give clear direction and to drive the team forward.
“With his performances in 2014, Nico has demonstrated to the outside world what we knew already in the team: that he is one of the very top drivers in Formula One. This new contract brings us important stability and continuity for the future and I am delighted to be able to make the announcement in time for the home race of Mercedes-Benz and Nico in Hockenheim."
Rosberg enters this weekend’s Formula 1 Grosser Preis Santander von Deutschland 2014 at Hockenheim with a four point lead over team mate Lewis Hamilton in the drivers’ standings.