The 25-year-old, who joined the Blues in 2010, will now remain with the Seasiders until 2015, with the option of a third year based on appearances.
"We're very happy that Luke has decided to stay with us and sign a new deal. He's a player who I like a lot because he can play at left-back or the left side of defence, so he gives me defensive options," Southend boss Phil Brown told the club's official website.
"He works hard and showed a very good attitude towards the end of the last campaign, he'll have a big part to play this season."
Prosser made 36 appearances for the club last season.