Gwynn, who has spent his entire 19-year career with San Diego, gets the signing bonus added to his $4.3 million salary for this season.
The Padres hold a $6 million option for 2001 that kicks in if Gwynn makes 502 plate appearances this season. If he falls short and the club declines the option, Gwynn will receive a $2 million buyout.
"It's a great feeling to get it done," Gwynn said. "Now let's concentrate on baseball."
The deal does not guarantee is that Gwynn will be a Padre in 2001. He only made 446 plate appearances last year.
"That's what I've said all along," Gwynn said. "I don't mind having to go out there and earn it. I like the fact that I get a chance. You don't get to 502 (plate appearances) unless you're playing. If I don't get there, the club has the option. They can pick it up or not. I think that's fair."
Gwynn, 40, originally asked for a straight extension, but management, citing Gwynn's age and history of injuries, didn't budge from an option year.
"We're very pleased that we were able to get it done," Padres manager Kevin Towers said. "When Tony plays, I don't think any of us can help becoming a fan. Now we'll continue to watch him have success."
Despite a calf injury in 1999, Gwynn batted .338 with 10 homers and 62 RBIs and got his 3,000th career hit of his career Aug. 6 at Montreal against Dan Smith. Gwynn has 3,067 career hits, 18th on the career list.
His negotiations with the Padres became public and sometimes rancorous. But, he said, the figure he had in mind for 2001 all along was $8 million, which is what he will earn if the option is picked up.
"That's what I thought I was worth," Gwynn said. "I didn't compare myself to anybody because there's nobody to compare me to."
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