In the annual presentation dinner, club president, the Earl Spencer announced that Panesar has signed with Northants until 2008.
Panesar was one of the 13 players to receive central contracts.
''I am please to have signed a two-year contract with the Northants, I am looking forward to continuing to work with David Capel, David Ripley and my team mates. I would like to thank all the members and fans for their support,'' Panesar said.
Chief Executive, Mark Tagg added, ''We are absolutely delighted that Monty has decided to continue his association with the Club.
Monty has been a shining example of our development work and we hope that he is the first of a number of young players who we currently have in our squad and our Academy who will become household names for England over future years.''