The re-signing of Williams further strengthens the Ospreys squad for next season, and demonstrates their ambition to compete at the very highest level.
Williams' move comes hot on the heels of the recruiting of All Black Justin Marshall, and Wales internationals Lee Byrne and Tal Selley last week.
"The signings show the extent of the ambition of the board and I cannot imagine being anywhere else," said 29-year-old Williams.
"It's fantastic to have re-signed with the Ospreys and it's great to know I'll be staying here for the next three years.
"The side may have had a difficult year, particularly after the success of last season, but we are confident that we are heading in the right direction and that the success we deserve will return in the not too distant future."
Williams was dropped for some of the Ospreys' crucial Heineken Cup matches this season, but the region say he is a important part of their future plans.
"We are delighted to have re-signed Shane as he is a real crowd pleaser and a big favourite with Ospreys supporters," said Ospreys regional rugby manager Derwyn Jones.
"He has now firmly established himself within the Welsh team and most of the top clubs in Europe would have been keen to secure his services.
"We are confident that the strategy we are following will bring success on the field and this is another vital piece in the jigsaw.
"Things are shaping up well for next season and there are only a few more gaps that now need to be filled."