The German's contract had been due to expire at the end of the present season, but he will now continue to partner triple world champion Lewis Hamilton for the next two years.
Rosberg has contested more than 100 Grands Prix for the Silver Arrows, having joined the team ahead of the 2010 season. In that time he has claimed 19 wins and 45 podiums, although he has also witnessed Hamilton win the championship for the past two years as Mercedes have dominated.
This year Rosberg currently has the advantage, leading Hamilton by one point heading into this weekend's Grand Prix in Hungary, the 11th round of the season.
Confirmation of the deal means Mercedes, Ferrari and Red Bull will all retain their current line-ups next year.
The only active world champion without a confirmed deal in place is Jenson Button, whose future at McLaren continues to be the subject of speculation.