Next season will be the Finnish driver's fifth with the Silver Arrows. Team-mate Lewis Hamilton's future beyond this year is yet to be confirmed but it is expected the six-time world champion will also stay with Mercedes.
Bottas, who won the opening round of the season in Austria, said: "I'm very happy to stay with Mercedes in 2021 and build on the success we've enjoyed together already.
"The past few years have been all about continuous improvement, working on every aspect of my performance. I'm confident that today I'm the strongest I've ever been, but I can always raise the bar.
"Ever since I fell in love with F1 as a kid it's been my dream to one day become world champion. I'm in the fight for the title this year and staying with Mercedes puts me in the best possible position to compete for it next season as well."
Bottas had widely been expected to be retained by Mercedes, particularly after their junior driver, George Russell confirmed he will be staying at Williams until the end of next season.
While not quite on Hamilton's level, Bottas provides stability at Mercedes - with the all-conquering team on course for a remarkable seventh straight drivers' and constructors' championships.
Team principal Toto Wolff said: "We are very excited that Valtteri will stay with the team for at least one more season. We're seeing the strongest Valtteri we've ever seen this year - in terms of his on-track performance, but also physically and mentally.
"He is second in the championship, finished the last season in P2 and plays a very important part in our overall team performance."
Additional reporting by Press Association.