The deal, which runs through the 2013-14 season, is worth $7 million and has a salary-cap hit of $3.5 million, a source told ESPN.com's Pierre LeBrun. Duchene will make $3.25 million next season and $3.75 million in 2013-14, according to the source.
Duchene, 21, has enjoyed a productive start to his career with the Avalanche, scoring 65 goals and 150 points over his first three seasons in the NHL.
"Matt is an important part of our team," Avalanche general manager Greg Sherman said in a statement. "We are excited to come to terms with him and we look forward to seeing him at camp."
Duchene struggled with knee and ankle injuries throughout this past season, finishing with 14 goals and 14 assists in just 58 games. The Ontario native scored a team-leading 67 points and was selected to the All-Star Game in 2010-11.
The third overall draft pick in 2009, Duchene burst onto the scene with a 55-point rookie season, culminating in a selection to the NHL's All-Rookie Team.
The signing of Duchene was the latest move in what has been a busy offseason for the Avalanche, who signed right wing David Jones to a four-year, $16 million contract and Matt Hunwick to a two-year deal on June 7. Colorado also signed coach Joe Sacco to a two-year extension and brought back captain Milan Hejduk for another year.
Information from The Associated Press was used in this report.