The 25-year-old is often regarded as one of the best white-ball spinners in the country and was part of the England Lions squad which shadowed the senior Test team in the early weeks of the Ashes.
The player has 106 games under his belt for Lancashire across all formats - an impressive total considering he made his first-class debut in 2016.
The leg-spinner has featured for England in five ODI's and four T20's. He also averaged 20.55 during last year's County Championship.
Speaking about his decision to extend his stay at Lancashire, he said: "It is a great feeling to know that I will be playing my cricket at Emirates Old Trafford for another two seasons and hopefully many more after that," said the academy product.
"The club has shown great faith in me since my early days in the Academy as a 13-year-old and I hope that my performances in recent years have repaid their trust and will continue to do so.
"Last year felt like a real breakthrough season for me in red ball cricket and it was brilliant to be able to contribute to so many winning performances."
Lancashire director of cricket Mark Chilton added: "Parky is regarded as one of the world's best white-ball spinners and we are thrilled that we have secured his services for at least another two seasons.
"His red ball bowling has improved immensely in the last couple of years and, even at 25, Matt is now one of our more experienced players with over 100 appearances in all formats behind him."