The Senegalese striker's current deal was set to run out in January but Diouf has agreed terms on an extension that will see him remain at Elland Road until the end of the 2013/14 season.
Boss Neil Warnock told the Whites' official website: "We're delighted he's agreed everything and hopefully he'll enjoy the next 18 months with us.
"Obviously it's a massive boost for everyone to know we're going to have him around and this is what we've wanted to do.
"He's a match-winning player, and there aren't many of them around.
"He's a player who can change a game and I'm delighted we've been able to keep him.
"He's also fitted in really well, and he's been great with the lads."
The 31-year-old has scored five goals in 24 appearances for the Whites after joining in the summer.