They have decided that he is the best option as support to four-time world champion Sebastian Vettel, who leads their team.
It will be a seventh year at Ferrari for the Finn, who won their last drivers` title in 2007.
Raikkonen`s second run with Ferrari has been up and down - he was comprehensively outperformed by his first team-mate Fernando Alonso in 2014 and by Vettel in 2015.
Raikkonen has again generally been behind Vettel this season but has shown some improved form and this was enough to persuade them to retain him for at least another year.
The decision was also partially based on the lack of availability of top-line replacements.
The team were very interested in Red Bull drivers Daniel Ricciardo and Max Verstappen, but both are under contract to their existing team for at least another two years.
Toro Rosso`s Carlos Sainz and Force India`s Sergio Perez were also on their list.
However, they are also under contract to their existing teams and would have had to be bought out of those deals hadFerrari decided they wanted them.
