Several teams, including the Minnesota Vikings, were hoping Levens would be released as teams got down to the $67.4 million salary cap in preparation for free agency Friday.
Levens, who missed much of last year with knee injuries, will team with Ahman Green to give the Packers one of the best tailback tandems in the NFL.
"In order to achieve all that we want to achieve, we need at least two quality halfbacks," coach and general manager Mike Sherman said. "Dorsey Levens and Ahman Green give us that. The combination of these two players in our offense should prove beneficial.
"I am extremely excited about Dorsey's decision to remain a Packer."
Levens might have found the free agency market more lucrative, but his agent, Hadley Engelhard, said the running back never seriously considered leaving Green Bay.
"He's been a Packer his whole career, and with Dorsey in the backfield, they're still a contender," Engelhard said.
Levens was in the fourth season of a five-year, $25 million contract he signed in 1998 after a protracted holdout. Before the restructured contract, he was to earn $6 million in 2001 and count a whopping $7.4 million against the team's cap next season.
Had Levens not accepted their offer, the Packers would have released him to gain $4.6 million in salary cap relief.
Neither side would reveal financial terms of the new pact.
"The Packers asked us not to," Englehard said. "But I can say it's a three-year contract and there are a lot of incentives."
Last week, Sherman said Levens was more concerned about playing time than money.
Levens, an eight-year pro from Georgia Tech, missed most of last season with injuries to both knees and a sprained ankle. He started just five games, rushing for 224 yards and three touchdowns on 77 carries and catching 16 passes for 146 yards.
In his absence, Green became the Packers' leading rusher and receiver and emerged as one of the best offseason acquisitions in the NFL.
Traded from Seattle, he rushed for 1,175 yards on 263 carries in just 11 starts. His 10 rushing touchdowns were the most by a Packers player since Terdell Middleton scored 11 times on the ground in 1978.
Engelhard said Levens ees himself as the incumbent starter, however.
"Dorsey didn't lose his job. Ahman did not beat him out," Engelhard insisted. "Dorsey Levens was injured."
Engelhard said Levens has been rehabbing this winter and should return to action soon. The Packers' pre-draft minicamp is March 20.
Levens ranks sixth on the Packers' all-time rushing list with 3,772 career yards on 962 carries. He also stands second among running backs in club history with 247 career receptions, behind only Gerry Ellis's 267.
The Packers also have renegotiated Brett Favre's contract to gain significant salary cap relief next season.
Both sides delayed that announcement until Friday, saying they didn't want to see another quarterback and his agent immediately top Favre's contract, which is expected to be for six years and include a partially deferred signing bonus of about $15 million.
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