Hannon-Dalby (29) signed from his native Yorkshire ahead of the 2013 season and has been part of the Bears teams that won the T20 Blast in 2014 and reached the final in 2017.
Paul Farbrace, Sport Director, said: “Olly works exceptionally hard at all areas of his game and it’s been great to see his efforts rewarded in recent weeks with some excellent performances with the red ball.
“He’s a very skilful seam bowler who has a good record in all forms of the game and is playing some of the best cricket of his career.
“Olly is also an excellent man who does a huge amount of work for the club off the field, including coaching our young cricketers, acting as our PCA representative and supporting our media and community teams.
“He’s a very proud adopted Bear and I’m sure that many of our Members and supporters will be delighted that Olly will remain at Edgbaston until at least the end of the 2021 season.”
Hannon-Dalby has taken 70 wickets at an average of 22.77 in 51 Blast games for the Bears.
“I’ve enjoyed my time tremendously since I joined the club in 2013 and we’ve had a good amount of success on the field as well,” said Hannon-Dalby.
“The team has seen a bit of change in the last couple of years and we’ve seen more young players come through our pathway who are making their way in the game. As one of the more experienced players, I see it being part of my role to offer advice and support to help these guys develop.
“We’ve got very exciting times ahead and I’m thrilled that I can be part of this as a Bear.”