The defender's previous deal was due to expire at the end of this season, but the Midlands outfit have secured the services of the 24-year-old on fresh two-year terms.
Dawson, who was the subject of multiple bids from newly promoted Burnley during the transfer window, scored the first goal in West Brom's 4-0 win over Sean Dyche's men in the Premier League on Sunday.
After making 21 top-flight appearances for West Brom in the past three seasons, Dawson has played every minute of Premier League action under new boss Alan Irvine during 2014-15.
"Obviously Craig was very unsettled when I first arrived in the summer but we as a club were never interested in selling him," Irvine said.
"We felt he had the potential to be a top centre-back and once he got his head settled and knew he wasn't going anywhere he started to put in very good performances.
"His level of consistency has kept him in the team despite our having top international centre-backs breathing down his neck.
"Getting a new contract, which he thoroughly deserves, completes a great start to the season for him and I'm really pleased for the lad."
