In his 13 appearances for the Province this season, the flyhalf has scored 2 tries, produced 5 assists and kicked 111 points.
Jackson has also become an important figure for Ireland, starting all three Tests during last year's summer tour to South Africa, before playing a prominent role in the historic November Series.
The 25-year-old, who started the opening two games of this season's RBS Six Nations Championship, has played a total of 22 times for Ireland since his debut against Scotland in 2013.
Commenting on his new deal, Jackson said:
"I'm delighted to be staying on at Ulster Rugby for at least another two years. It is such a proud moment for myself and my family.
"Every time I pull on the Ulster jersey it is something that I don't want to take for granted and I hope to continue to grow as a player and contribute to this team in a positive way.
"I believe that the pillars for success are in place here at Ulster with a quality squad and management team. I am hugely excited by the challenges that lie ahead and I'd like to thank everyone who has helped me to this point in my career."
Director of Rugby, Les Kiss, welcomed the announcement:
"To have Paddy commit to Ulster for a further two seasons is a huge boost. He progressed through the Academy structures here and has grown into a fantastic player and leader, who commands the respect of the entire squad.
"He is the type of player that we can build the team around and it's important that we have home-grown talent at the forefront of what we're trying to achieve here. His ability and leadership will be critical for us in the future.
"Paddy's form over the past few years has been widely acknowledged and it was no surprise that there was a lot of interest in him from other big European clubs.
"It was far from a straightforward process but Bryn (Cunningham, Operations Director) has done a marvellous job in negotiating the terms of the contract and I'm really pleased with the solution that we have in place."