Dunn came through the academy at Ewood Park, and either side of a four-year spell with Birmingham City, the 34-year-old has gone on to make 366 appearances for his hometown club.
His decision to stay in the North-West has delighted manager Gary Bowyer, who believes that the former England international's experience will be invaluable to the younger members of his first-team squad.
The 43-year-old told the club's official website: "It's a rare commodity nowadays that a player starts in the football club's academy and has a long career there - he is Mr Blackburn Rovers.
"I'm delighted that he's been able to continue his association with the club. This season, his experience will be invaluable for us both on and off the pitch."
Dunn netted four goals in 24 appearances in all competitions during the last campaign.