The winger has been in inspirational form this season, helping the Dons' push for a play-off spot in League One.
Karl Robinson's side currently sit in sixth place and Powell is the club's second top scorer, bagging eight goals in 22 league appearances as they look to secure Championship football next season.
Robinson said: "I am thrilled Daniel Powell has committed his long term future to the club, it shows we are doing things in the right way because a number of clubs have been chasing him and he has decided staying at MK Dons will only strengthen his career."
Source: PA
Source: PA