The former Wallabies star returned to rugby league in controversial circumstances when he joined the Perpignan-based outfit in February until the end of the season.
Folau’s capture angered many given he was sacked by Rugby Australia last year for posting homophobic comments on social media.
But the 31-year-old centre made an instant impact in Super League, scoring one try in his three appearances before the sport was shutdown due to coronavirus in March.
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Catalans say, ‘despite a strong interest’ from other parties, Folau has agreed to carry on with the Super League club in 2021.
Some NRL clubs were thought to be interested in the services of a player who started out at Melbourne Storm before joining Brisbane Broncos and then moving to AFL in 2011 before switching again to union two years later.
Dragons chairman Bernard Guasch said: “His decision to stay at the club for one more season honours him.
“Once the media storm that followed his signing passed, and after only three Super League appearances, he received many requests and became a highly demanded player.
“But he feels gratitude for the club. He’s shown he is a respectful player since he arrived at the club.
“He will be 32 years old at the end of his new contract and we will then think about the rest of his career.”
The ex-Queensland State of Origin and Kangaroos star explained: “Me and my family are very excited to stay on at the club for season 2021.
“We're very grateful for the opportunity that Bernard Guasch and the Dragons have given me.
“I'm looking forward to working hard and achieving great success on the field with my team mates and this great club.
Catalans coach Steve McNamara added: “We are delighted that Israel has committed to the Dragons for 2021.
“The most impressive asset he showed in the short period before the confinement was his willingness to work hard for the team.
“On top of that he clearly is a great athlete with a tremendous skill set. We look forward to seeing him continually improve and have an even greater influence over the team’s performances through 2020 and 2021.”
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