The 30-year-old midfielder has made over 100 appearances for the Dons and has now extended his current contract to keep him at stadium:mk until June 2013.
Dons boss Karl Robinson said: "Luke is a player who gives his all on the pitch and on the training ground.
"He is a total professional which may be down to his Manchester United schooling. I am absolutely over the moon to sign Luke Chadwick again, the fans love him and sing his name.
"He loves the club and he plays a very attractive free-flowing style of football."
Chadwick made 39 appearances for the Red Devils between 1999 and 2004, picking up a Premier League winners' medal in 2001 and has also played for Reading, Burnley, Royal Antwerp, West Ham, Stoke and Norwich.