The 25-year-old Briton, who made his F1 debut in Australia earlier this year, will partner Nico Hulkenberg, whose move to the Enstone team from Force India was confirmed last month.
Renault Sport Racing Chairman Jerome Stoll said Palmer's improving form - the Briton scored his first Grand Prix points recently in Malaysia - had been a factor in the decision to keep him for another season
"We are delighted to retain Jolyon as our driver for the 2017 season," Stoll said. "Jolyon has shown his hunger to develop with us as the team grows and we have been impressed with his increasingly strong performances on track as the season has progressed.
"We are confident that the combination of Jolyon and Nico Hulkenberg offers a very promising driving force to meet our goals. Jolyon understands the team’s spirit and motivates everyone he works with.
"The line-up of Jolyon and Nico harnesses the benefits of continuity and fresh blood. I am sure that having Nico as a team mate will help push Jolyon to greater achievements."
Stoll also paid tribute to Kevin Magnussen, who will leave the team after single season, adding: "We thank Kevin for his efforts in 2016 as he has done a great job for us this year. We wish him all the best for 2017 and beyond.”
Palmer meanwhile admitted he has faced a 'steep learning curve' since stepping up to F1, insisting that his best performances are ahead of him.
"I’m over the moon to be racing with Renault Sport Formula One Team for a second season and I can’t wait to reward the team’s faith in me on track," he said.
"Having worked out of Enstone since 2015 I can fully appreciate the development of the infrastructure this year. This means I share the excitement of the team looking to 2017 and our new car.
"For me, it’s been a steep learning curve driving in Formula 1 and I know that I am performing better than ever, and that there’s still more to come. There is tremendous drive and enthusiasm in Enstone and Viry looking to next year and I am honoured to be part of this."
Palmer’s confirmation is likely to be the prelude to several other moves in the driver market, with Magnussen expected to join Haas as partner to Romain Grosjean for 2017. Manor's Esteban Ocon meanwhile has been heavily linked to the vacant seat alongside Sergio Perez at Force India.
