The highly-rated goalkeeper was out of contract at the end of the season, but he has now committed his future to The Posh.
"I am delighted Mark has signed a contract extension, which will keep him at London Road until 2005," manager Barry Fry told the club's official website.
"I have had five meetings with his agent and it is a great relief for the club and the supporters as he is a huge asset to Peterborough United.
"Hopefully we can now put it all to bed and concentrate on the football. When this contract runs out Mark will have served 10 years with the club and I will be speaking with the Football League so I can arrange a testimonial match for him."
Tyler was happy to have sorted his future out and commented: "I am settled in Peterborough, I have recently got married and I always wanted to stay at the club.
"This has been hanging over me for a while and I am delighted to finally sort everything out.
"This club has massive potential and I am sure that when the take-over is sorted out, we will push on. I believe the club should be in the First Division and promotion is a real aim for us."
