O'Driscoll, who will travel on his fourth British and Irish Lions tour next month, turned 34 this year and had said he would wait until July to decide on whether to call time on a glittering 14-year international career.
The centre's decision will come as a big boost to Leinster and to new Irish coach Joe Schmidt, whom O'Driscoll holds in high regard, as he looks to pick the national side up from its worst Six Nations championship in 14 years.
"I want to thank the IRFU and Leinster for allowing me the time to think about my future and discuss my options with my family," O'Driscoll, whose form has not declined with age, said in a statement.
"The support my family and the Irish and Leinster fans have shown me over the past few months, and indeed years, has been phenomenal and I am now very much looking forward to one more year playing with Ireland and Leinster."
Already Ireland's record try scorer by some margin, O'Driscoll will now probably overhaul out-of-favour fly-half Ronan O'Gara as the country's most-capped player. He needs three more appearances to match the Munster man's 128 caps.
O'Driscoll also led Ireland on a record 83 occasions, more than twice as anyone else, before former coach Declan Kidney controversially handed the captain's arm band to Leinster team-mate Jamie Heaslip this year.
Before he travels to Australia with the Lions, O'Driscoll will hope to add the Amlin Challenge Cup and RaboDirect Pro 12 to a trophy collection with Leinster that already includes three Heineken Cups.
Schmidt, who will lead Leinster for the last time in those two finals, had said when he accepted the Ireland job last month that he would do all he could to keep hold of the man named player of the last decade by Rugby World magazine.
"It's great that Brian has agreed to continue playing. He's an inspirational player, not only on the pitch, but also on the training ground," Schmidt said.
"I know that every squad of which he is a part will profit from his qualities both as a rugby player and a person."