The 30-year-old has committed himself to the Eagles until the end of the 2020-21 season.
McArthur, who has played 136 games for Palace since signing from Wigan four years ago, said on the club's website: "I'm excited about the challenges that come. The manager has brought the best out of me from last season, and I really enjoy playing under him."
Palace chairman Steve Parish said: "James is the epitome of a model professional. He sets a brilliant example to other players, and is a real team man.
"James has been a huge success at the club and embodies everything we are about at Crystal Palace. We are absolutely delighted that he has resigned with us."
Palace returned to winning ways in the Premier League on Saturday with a 1-0 victory at Huddersfield following two defeats on the bounce before the international break.
Additional reporting by the Press Association