The 6ft 6in second row forward, who burst onto the Guinness Premiership last season after signing from the Cornish Pirates, will remain at Gloucester until 2010.
James (30) made 18 appearances in all competitions in his debut season for the club last year and notched one try. He has four Wales caps to his name.
"The last few months have been an incredible journey for me in terms of my rugby development and to get this opportunity to stay at Gloucester in one of the most exciting times in the club's history is great," he said.
"To have experienced international rugby with Wales, been part of the World Cup and be involved with one of the best teams in the Guinness Premiership is fantastic - I just want to become the best player I can in this environment.
"Gloucester have assembled a wonderful group of players, head coach Dean Ryan is clear about his aims for the future and I want to play my part in that - signing this contract gives me some stability for the future."
Gloucester's head coach Ryan added: "Since joining the club, Will has made a big impression. He is a dynamic ball carrier, a very good athlete and a player who has added significantly to our squad.
"We are building what we believe is a very competitive squad that is capable of challenging for honours and Will has a big part to play in that.
"I am pleased we are able to keep announcing these signings because it emphasises what we are doing is right - and that is excellent news for the club."
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