RNZ reports Dagg made the announcement on social media.
"I've decided to stick around in New Zealand for the next three years and do my time with the Crusaders."
It means he will be available for the 2019 World Cup in Japan.
The 28-year-old has re-signed with New Zealand Rugby, the Crusaders and Hawke's Bay Magpies through to 2019, spurning offers from overseas.
"There's no doubt that there were some attractive offers to consider," Dagg said, "but at the end of the day I love my life here in New Zealand with my family, friends and team-mates and I'm not ready to give that up."
"I still feel blessed every time I pull on the jersey for the All Blacks, Crusaders or Magpies so I consider it an honour to be able to keep working hard to earn that right for the next three years."
Dagg's re-commitment comes just days after his team-mate Ben Smith re-signed with New Zealand Rugby.
All Blacks Head Coach Steve Hansen said: "To have a player of Israel's ability and versatility re-sign is a major lift for all levels of New Zealand Rugby ...and to be able to plan the future, knowing that we'll have him involved makes life so much easier for us all."
Crusaders Head Coach Scott Robertson commended Dagg's sense of loyalty and pride in the teams he represents.
Dagg made his All Blacks debut in 2010 and has been with the Crusaders since 2011.
Dagg was a part of the winning 2011 Rugby World Cup team and became a regular selection for the All Blacks but injuries limited his rugby in 2014 and 2015.
He played three Tests in 2015 but was not selected for the RWC 2015 squad.
After a lengthy recovery period following surgery on a dislocated shoulder suffered playing for Hawke's Bay, he returned in great form for the Crusaders in 2016 and earned a recall to the All Blacks last year.
With his Crusaders and Highlanders caps combined, Dagg will mark 100 Super Rugby games the first time he takes the field for the Crusaders in 2017.
He recently announced that he and wife Daisy were expecting their first child.