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The midfielder was a product of the Rovers youth team and, aside from a four year spell with Birmingham, has spent his whole career at Ewood Park.
Manager Steve Kean told the club's website: "Everyone knows that not only is David Blackburn Rovers through and through, but he remains a top player and a key member of our squad.
"He has been at the top of his game over recent weeks and we are all delighted to see him extend his association with the club."
The 32-year-old made his Rovers debut in September 1998 in a goalless draw with Everton and has gone on to make 313 appearances over both spells at the club, scoring 53 goals.
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Dunn left Rovers for St Andrews in 2003 but was brought back to Ewood Park in January 2007 by then manager Mark Hughes.
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