The 29-year-old is tied to the Tannadice club until May 2015.
Dillon said: “I love being at Dundee United. This club and the local area fit nicely in with my personal and career ambitions. The progress the club makes each year gives you a real buzz and my desire to continue to improve personally as well as improve the club’s fortunes made signing the extension an easy decision.”
The Irishman, who can play full-back or in central defence, joined United in January 2007 and has made more than 200 appearances, including in the 2010 Scottish Cup final win.
United manager Peter Houston said: “Sean is a model professional who has a great impact on his fellow players both in the dressing room and on the pitch. His versatility is also a great option to have although, over the last few years, he has cemented his place in central defence.
“It is so important to Dundee United that we have experienced players in the team alongside the developing youngsters and Sean’s experience is as vital as his excellent footballing ability.
“It is great that he was keen to extend his contract here and Sean still has the best years of his career ahead of him. I am chuffed that he sees them at Tannadice.”