The deal will pay the four-time All-Star $9.35 million and was made on the same day, for the second year running, the player and team were scheduled to exchange arbitration figures.
The powerful right-hander made $6.25 million last season and can become a free agent after the 2011 campaign.
Papelbon converted 38 saves in 2009 while posting a 1.85 ERA. At just 29, he is already Boston's all-time saves leader with 151 having taken over the role of closer for the team in 2006.
(Writing by Jahmal Corner in Los Angeles; Editing by John O'Brien)