Dagg staying with All Blacks
Retaining the 28-year-old is a major coup for New Zealand Rugby, which last week also secured fullback Ben Smith's services until 2020.
Dagg said he had to weigh up accepting a well-paid contract offshore with staying with the All Blacks, who do not allow overseas-based players into the team.
"There's no doubt that there were some attractive offers to consider," he said.
"But at the end of the day I love my life here in New Zealand with my family, friends and teammates and I'm not ready to give that up."
Dagg, who has played 61 Tests, has already experienced life without the All Blacks after being dropped for the 2015 World Cup campaign.
He bounced back determined to prove a point and was one of the All Blacks' standouts last year.
"To have a player of Israel's ability and versatility re-sign is a major lift for all levels of New Zealand rugby," All Blacks coach Steve Hansen said.
Dagg will also stay with his Crusaders Super Rugby team.
Crusaders Head Coach Scott Robertson commended Dagg's sense of loyalty and pride in the teams he represents.
"We have an idea about the sort of offers that players of Israel's calibre are presented with from overseas, and it can never be easy for a player to turn that down," said Robertson.
"But Izzy is a player who, for all of his natural talent, has never taken his place in a team for granted. He has experienced disappointment, and that has only increased his appreciation and determination.
"He is such a positive influence on this team, on and off the field, so we couldn't be happier to have him sticking around."
Agence France-Presse
