The midfielder was made club captain in 2009 and led the west Londoners to the Europa League final in 2010.
He said: "It is a great source of pride for me to have played a role in some truly historic moments for Fulham FC."
Chester-born Murphy started his career at Crewe and played for Liverpool, Charlton and Tottenham before arriving at Fulham in a year-long deal in August 2007, under then manager Lawrie Sanchez.
Murphy's contract was due to expire this summer but he told fulhamfc.com that he was delighted to have signed a further extension.
"As a club we've achieved great things during my time at Fulham so far, not least our highest-ever league finish [seventh in the 2008-09 season] and reaching the Europa League final," he added.
How important is Murphy to Fulham? "We've made great progress, on and off the pitch over the past few years, and with the chairman's continued support, I believe we've got many more great years ahead of us."
Fulham currently sit in 15th position in the Premier League but turn their attention to the FA Cup on Sunday when they host Murphy's old club, Tottenham, in the fourth round.
Murphy said the team would "give their all" in the tie, adding: "I'm sure it's going to be a great atmosphere at the Cottage and hopefully we can continue our impressive start to 2011."