James made 35 appearances for Nigel Pearson's side as they claimed the Championship title last season, and he is now preparing for his first campaign in the top flight.
The 22-year-old moved to the King Power Stadium in May 2012 from Manchester United and has featured 70 times since, scoring five goals in all competitions.
He formed a midfield partnership with Danny Drinkwater for Leicester last season, and is looking forward to building on it in the Premier League.
"I'm absolutely buzzing," he told the club's official website. "I can't think of any other way to describe it.
"Heading into the Premier League, after the unbelievable season we've just had – to sign a four-year deal with this club is just fantastic.
"For any club to offer you a long-term contract is a big compliment and shows a lot of faith in your potential, but to be offered one by a club as ambitious as Leicester City is something else.
"The club's got an exciting future and I'm delighted that I'm going to be part of it."
The news of James' signing comes a second boost after Drinkwater also committed his future to the club last month.
