Montgomery, who initially signed a two-year deal back with Newport in 2002 has now pledged his future to the Gwent regional side after cementing himself as one of the pivotal players in the side.
Montgomery, 30, is South Africa's record points scorer, and his commitment to the Dragons shows the Gwent side have the ability to retain stars of high calibre.
The Dragons, under the guidance of now Wales coach Mike Ruddock were the surprise package in the Celtic League last season, finishing in third.
'This is great news for the players and fans because Percy has become a bit of a talisman for the team,' said chief executive Andy Marinos.
'His commitment to the Dragons' cause has been fantastic.'
Montgomery has shone in the Principality, and has resurrected his international carrer after catching the eye of Springbok coach Jake White after a series of match winning performances.
He scored 16 points on his first game back in a South Africa jersey against Ireland in June, and has since added a further 42 points in the three more Tests to become his country's top scorer on 319 points.