Toulalan, 31, and club captain this season, was out of contract in June but has put pen to paper on a deal tying him to the Principality club until June 2017.
"Jeremy Toulalan, who was coming to the end of his contract, was one of our priorities and we are proud to be able to count on him for the coming seasons," vice-president Vadim Vasilyev said on the club's official website.
Toulalan, who joined Monaco from Spanish club Malaga in 2013, said he came to the club "to go as high as possible. We achieved that the first year with the UEFA Champions League. Now I will try my best to help the young players here."