Williams, who was involved in the Bloodgate episode that rocked rugby almost four years ago, has pledged his future to Quins until at least 2015. The Brighton-born player has scored more than 50 tries for Quins and is an England sevens international.
"Tom's form over the last 12 months has been outstanding, and we are all really looking forward to him continuing that over the coming years," Quins rugby director Conor O'Shea said.
Williams added: "I am delighted to be staying at Harlequins for a further two years.
"The opportunity to contribute to a club playing such an exciting brand of rugby with a group of ambitious and talented players made the decision to stay an easy one."
Williams left the field with what turned out to be a fake blood injury during Quins' Heineken Cup quarter-final clash against Leinster at the Twickenham Stoop in April 2009.
Quins' aim had been to get goalkicker Nick Evans, who had earlier gone off injured, back on to the pitch in a game that Leinster eventually won 6-5.
And the fall-out was widespread, with then Quins rugby director Dean Richards being hit with a three-year worldwide coaching ban, Williams receiving a 12-month suspension that was reduced to four months on appeal and Quins being fined £260,000.