Nielsen's deal is worth $11 million, according to multiple sources.
"I'm proud to be part of it for another four years," he said Tuesday. "They have treated me so good here and I can't wait to be contenders again."
The 27-year-old forward, drafted by the Islanders in 2002, was set to become an unrestricted free agent this July, prompting the Islanders to lock him up long term.
Nielsen has nine goals and 16 assists in 52 games for the Islanders this season. His solid two-way play earned him a significant pay raise.
General manager Garth Snow signed him to a four-year, $2.1 million deal in 2008.
Katie Strang covers the NHL for ESPNNewYork.com. Information from The Associated Press.