The 38-year-old World Cup winner had been in talks to extend his stay in Australia and the club confirmed on Thursday both parties had agreed to activate the second year of his $2 million-a-season contract.
"I am very happy to be staying at Sydney FC for another season," Del Piero said.
"I chose Sydney FC at the beginning of this season because I wanted to show my love of football in another country and I have enjoyed the challenge and my time at Sydney FC and in Australia.
"I have always said I want to continue that for next season but first we must work hard for success on the field for the rest of this season."
The former Juventus striker has enjoyed a spectacular first season in the A-League, scoring 11 goals in 18 matches - the highest-ever goal haul by a Sydney FC player in a single season.
He's also been a smash hit off the park, helping to generate greatly-increased media interest, crowds and television ratings.
Del Piero was reportedly a target of clubs in the US and Brazil but he has stated his desire to remain in Sydney, where his family have settled well.
His form has helped the Sky Blues to fifth place and looking a strong chance of qualifying for the finals.
Sydney FC chairman Scott Barlow said the re-signing of Del Piero was a huge coup for the club.
"His performances on the field have been tremendous, highlighted by him becoming the leading goalscorer for Sydney FC in a single season, but off the field he has also delivered unprecedented interest and profile for Sydney FC across all levels of the club," Barlow said.
"We look forward to working together with Alessandro to increase the profile of Sydney FC and football in Australia as we strive for success on the pitch for the remainder of this season and next."