Hodge has played for the Red Rose county for the last two seasons, in between being called up for Australia duty.
"The squad has an excellent blend of youth and experience and should challenge for honours again," Hodge told the club website
The 31-year-old played five County matches last season and topped the batting averages with 74.4.
He will be the club's sole overseas player from the 2008 season when the rule-change in the number of foreign players comes into effect.
Lancashire also confirmed four players - Ian Sutcliffe, Paul Horton, Simon Marshall and Karl Brown - have signed new contracts.
In addition, Dominic Cork, James Anderson, Mal Loye, Glen Chappell, Mark Chilton, Gary Keedy, Sajid Mahmood, Kyle Hogg, Gareth Cross, Steven Croft and Tom Smith have all agreed to stay with Lancashire, sources added
James Foster stays with Essex: Essex wicket-keeper James Foster has inked a new three-year deal keeping him at the club until the end of 2009.
The 26-year-old took more dismissals than any other championship keeper last season and averaged 42.41 with the bat.
"There was never any problem with me signing a new contract, it just took a little longer to complete for a variety of reasons," he told the club website.
Foster had a knee operation at the end of the season but he is now back in full training. Last season Foster helped the team achieve success in the NatWest Pro40 and the Twenty20 Cup.