Green, who played in just 32 games because of injuries last season, will receive $6 million annually for the next two seasons and $6.25 million in the 2014-15 season.
Sidelined by a groin injury and abdominal surgery, he had seven points during the regular season, but finally healthy in the playoffs, Green added four points in 14 games.
The 26-year-old has 251 points, 82 goals, 169 assists in 298 games. Green ranks fourth in points among defensemen and was chosen for the NHL All-Star team in 2010-11.
The Capitals announced the deal Monday.