The agreement, worth a reported $4 million, retains Molina, who was acquired by the Yankees from the Angels on July 21 in exchange for Minor League right-hander Jeff Kennard.
Bolstering a bench that had been amongst the club's weakest in recent years, the 32-year-old Molina proved to be an excellent addition as Jorge Posada's veteran understudy, providing the switch-hitting catcher with needed rest on his way to an American League Silver Slugger campaign.
"I'm happy to stay there with the guys and be a part of a great organization with the Yankees," Molina said by telephone. "I'm really happy they were thinking about having me back to back up Jorgie.
"Right now, I feel like our team is pretty strong. We can win the World Series with Jorgie, Mariano [Rivera] and Alex [Rodriguez]. I think we have a very good chance."
Molina appeared in 29 games for New York, batting .318 (21-for-66) with one home run and nine RBIs. Molina hit safely in 12 of his 16 starts and batted .444 (8-for-18) with runners in scoring position, improving his season numbers to .257 (49-for-191) after appearing in 40 games for the Los Angeles Angels of Anaheim.
"Getting Molina back is really big for us," general manager Brian Cashman said. "It took a while to feel like we solidified that position, and this guy came over and did a fantastic job for us. We're glad we were able to keep him."
In order to make room on their 40-man roster, the Yankees designated first baseman Andy Phillips for assignment. A product of the Yankees' farm system who was selected in the seventh round of the 1999 First-Year Player Draft, Phillips fell victim to a numbers crunch at first base, where the Yankees are prepared to enter the 2008 season with Jason Giambi, Shelley Duncan and Wilson Betemit all on the roster and capable of playing the position.
Phillips, 30, suffered dual instances of tough luck during the 2007 season, batting .292 with two homers and 25 RBIs.
He missed an opportunity to win a position as the right-handed-batting portion of a first-base platoon with Doug Mientkiewicz when his mother was involved in an automobile accident during Spring Training, forcing Phillips to leave the team while Rule 5 Draft selection Josh Phelps impressed with a power stroke.
Phillips joined the Yankees in Colorado on June 19, when Phelps was designated for assignment, and he played intermittently as the club's starting first baseman, manning the position for an extended stretch. But his season came to an abrupt end on Sept. 2, when he was hit by a pitch and suffered a broken right wrist.
The transaction was announced after a Yankees contingent including Cashman arrived at the Gaylord Opryland Resort & Convention Center shortly after 4 p.m. ET.
New York continues to be linked in trade talk to Twins left-hander Johan Santana, though senior vice president Hank Steinbrenner has insisted that Minnesota will have a Monday deadline to accept a trade offer of right-hander Phil Hughes, outfielder Melky Cabrera and a second-tier Minor League prospect.
Bryan Hoch is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.