"To have a player of Israel's ability and versatility re-sign is a major lift for all levels of New Zealand Rugby," said All Blacks coach Steve Hansen.
"We appreciate the decision 'Izzy' and his wife Daisy have made, and to be able to plan the future, knowing that we'll have him involved, makes life so much easier for us all, and we look forward to the challenges ahead."
Crusaders coach Scott Robertson said it wasn't easy for players like Dagg to resist the huge overseas offers.
"Izzy is a player who, for all of his natural talent, has never taken his place in a team for granted. He has experienced disappointment, and that has only increased his appreciation and determination.
"He is such a positive influence on this team, on and off the field, so we couldn't be happier to have him sticking around."
The 28-year-old Dagg's signature completes the All Blacks outside-back stocks, with fullback Ben Smith having already rejected massive offers from Europe.
Dagg's future was in serious doubt after missing the 2015 World Cup squad, but he bounced back brilliantly, once Hansen switched him to the wing and returned Smith to fullback.
However, NZR has lost first five-eighth Aaron Cruden to Montpellier.
"We wanted to keep all three, but my gut feeling was we'd probably lose Crudes," Hansen told Newstalk ZB's Tony Veitch over the weekend.
"We've got the positive news from [Ben] and we're hoping to hear something positive from Izzy shortly, rather than negative news.
"If we can keep them both, it would be a fantastic effort and you have to say the rugby union have done a great job."
