The 38-year-old, who led the club to the County Championship title last year, will continue in his role as captain in four-day cricket.
Collingwood has scored over 600 first-class runs this season and finished as the team's leading wicket-taker in the NatWest T20 Blast tournament. The all-rounder has been in particularly fine form during the Royal London One-Day Cup too. An average of 68 with the bat and just 21 with the ball has been instrumental in Durham's progression to the quarter-finals of the competition.
A three-time Ashes winner with 68 Test caps to his name, Collingwood has enjoyed a glittering career since he made his first class debut for Durham against Northamptonshire in 1996. The Shotley Bridge-born star led his country to the ICC World Twenty20 title in 2010 and he remains England's most capped player in one-day internationals.
After hinting that this could be his final year as a professional, Collingwood will now stay at Durham and continue to lead the club's next generation of talent.
Collingwood said: "I had presumed this was going to be my last season but I'm really enjoying my cricket and feel as though I'm still contributing to the team "You're a long time retired and I've still got ambitions to take this team forward.
"It really is a special group of guys to be involved with and I don't want to give that up too early.
"We've got a lot to play for in the back end of the season with the quarter-finals and trying to avoid relegation, which would be a huge achievement.
"There is a bigger picture as well which is about having another year to continue to create a culture that will hopefully be around for another five to ten years. I'm certain that the backbone of this side, with the youngsters coming through, will be strong for years to come."