Iwakuma, 31, would have become a free agent after Saturday if he and the Mariners didn't come to an agreement, but the two sides hammered out a contract that includes an option for a possible third season in 2015.
As first reported by Jon Heyman of CBSSports.com, the deal is worth $14 million for two years, with Iwakuma earning $6.5 million in 2013 and '14, with a $1 million buyout on a $7 million option for 2015.
Iwakuma originally signed a one-year, $1.5 million base contract with Seattle last year as a free agent out of Japan.
"[Iwakuma] really helped solidify our rotation in the second half of the season," Mariners manager Eric Wedge said. "He is a competitor on the mound and did a great job for us. He got stronger with each start during the season and gained confidence. I am looking forward to seeing him on the field ready to work when we start Spring Training in Peoria."
Iwakuma went 9-5 with 3.16 ERA over 30 appearances in his first season in the Majors. He began the year as a long reliever, then transitioned into the rotation midseason and went 8-4 with a 2.65 ERA in 16 starts.
Iwakuma's ERA as a starter set a rookie club record, bettering the previous mark of 2.67 by Felix Hernandez in 2005. Among AL pitchers with at least 100 innings, his 3.16 ERA ranked seventh and he had the third-lowest ERA among AL starters with at least 15 starts.
Iwakuma had a potential $3 million in incentive bonuses in last year's contract but didn't reach any of the escalator clauses, which began at 20 starts and 140 innings pitched. He ended up with 16 starts and 125 1/3 innings.
That contract also included a stipulation that Iwakuma would become a free agent if no extension was agreed upon by Saturday. Iwakuma could have still re-signed with the Mariners in that scenario but wouldn't have been eligible to pitch until May 15, about six weeks into the regular season. Instead, Iwakuma agreed to the extension on Friday and now figures as part of Seattle's rotation going into 2013.
The 6-foot-3, 190-pounder joins Hernandez, Jason Vargas and Blake Beavan as returning starters, with Erasmo Ramirez, Hector Noesi and young prospects Danny Hultzen, James Paxton, Taijuan Walker and Brandon Maurer also expected to contend for jobs next spring.
Iwakuma was one of Japan's premier starters over the past decade as a three-time Pacific League All-Star and league MVP in 2008, compiling a 107-69 record with a 3.25 ERA in 10 seasons with Osaka and Rakuten. He pitched for Japan in the 2004 Olympics and 2009 World Baseball Classic.
After signing with Seattle, Iwakuma struggled in Spring Training while adapting to the different baseball and mounds used in the Major Leagues. He was used sparingly as a long reliever initially by Wedge, appearing in just five games in the first two months and posting a 6.00 ERA as of May 31.
But Iwakuma gradually began pitching better and gaining Wedge's confidence, making nine relief appearances and lowering his ERA to 4.75 in June before being inserted in the rotation on July 2. In his fifth start, he struck out a Mariners rookie record 13 batters in eight innings in a 4-1 victory over the Blue Jays and by the end of the season had established himself as one of the team's most consistent performers.
He went 6-2 with a 1.83 ERA and 43 strikeouts over his last nine starts, posting the second-best ERA by an AL starter during that stretch behind the 1.72 by Detroit's Max Scherzer.
Iwakuma was 4-0 with a 1.23 ERA in five games (four starts) against the AL West-rival Angels and seemed to get stronger the more he saw opposing batters, a factor he acknowledged in saying he gained comfort and confidence with continued exposure to Major League opponents.
"Hisashi did a very nice job for us at the end of last season as a starting pitcher and we are happy that we have come to a mutual agreement," said general manager Jack Zduriencik. "We look forward to his veteran presence and to his contributions for the next few seasons."