The former England all-rounder, 38, had initially planned to end his playing career at the end of the current campaign but will now continue to skipper the LV= County Championship side in 2015
Collingwood had done some coaching work with England's one-day side under Ashley Giles and may have formed part of the latter's backroom team had he been named as Andy Flower's successor earlier this year.
But the appointment of Peter Moores, supported by Paul Farbrace, meant Collingwood refocused on his Durham duties.
With the county battling relegation Collingwood has scored 518 championship runs, while he has averaged 68 and taken 21 wickets in the Royal London One-Day Cup to help his side to the quarter-finals.
"I had presumed this was going to be my last season but I'm really enjoying my cricket and feel as though I'm still contributing to the team," he said.
"You're a long time retired and I've still got ambitions to take this team forward.
"It really is a special group of guys to be involved with and I don't want to give that up too early.
"We've got a lot to play for in the back end of the season with the quarter-finals and trying to avoid relegation, which would be a huge achievement.
"There is a bigger picture as well which is about having another year to continue to create a culture that will hopefully be around for another five to 10 years. I'm certain that the backbone of this side, with the youngsters coming through, will be strong for years to come."
Durham head coach Jon Lewis added: "Everyone at the club is delighted that Paul will be continuing his career.
"His contribution as a player, leader and character in the dressing room is difficult to measure.
"It is a big lift for everyone knowing that he will be with us next year."
- Sports & Recreation
- Paul Farbrace
- Ashley Giles
- Peter Moores
- Andy Flower