The deal is worth $2.6 million but could reach $3 million with performance bonuses, a source told ESPN.com's Pierre LeBrun.
"My family and I are very excited to continue my career here in Denver," Hejduk said. "I believe in this organization and our young players and look forward to helping the team in any way that I can."
Hejduk, 35, scored 22 goals and had 56 points last season, his 12th with the Avalanche. He tied Joe Sakic's franchise record by scoring 20 or more goals for the 11th straight season.
The Czech Republic native entertained thoughts of possibly calling it a career after the 2010-11 season. But now he's eager to return for another season following a frustrating year in which the Avalanche won their fewest games (30) and tallied their fewest points in the standings (68) since relocating from Quebec to Denver in 1995.
"It was a bad season last year, but I think this team has quite a potential if everybody gets healthy. I think it's going to be a different story. I'm still pretty positive for next year," Hejduk said. "It was always my intention to play for the Avalanche as long as I can and as long as they're interested."
Hejduk is one of the team's most prolific scorers, ranking fourth in franchise history in goals (357) and points (757).
"Milan has been a big part of our organization throughout the past 12 seasons," Avalanche general manager Greg Sherman said. "He's been one of the top goal scorers in the NHL over the last decade and we look forward to having him back."
With longtime defenseman Adam Foote's retirement, Hejduk becomes the elder statesman on a squad filled with youngsters.
"There's nobody near my age group," Hejduk said, chuckling.
A three-time Olympian, Hejduk won a gold medal with the Czech Republic at the 1998 Winter Games in Nagano, Japan, and a bronze medal at the 2006 Olympics in Torino, Italy.
Information from ESPN.com's Pierre LeBrun and The Associated Press was used in this report.