Terms were not disclosed but league sources told ESPN that it is a two-year, $10 million deal.
The second season of the deal will be a team option, source said.
The Mavs, in consultation with Nowitzki, declined a team option last month that would have paid Nowitzki a $25 million salary this season, $5 million of which was guaranteed. This marks the third time Nowitzki, the face of the franchise, has given the Mavs a significant hometown discount.
Nowitzki, a 13-time All-Star who ranks sixth on the league's all-time scoring list, is on the verge of joining Kobe Bryant as the only players in NBA history to spend an entire 20-year career with one franchise. Nowitzki, who was acquired in a 1998 draft-night deal with the Milwaukee Bucks, has frequently cited the exclusive 20-year, one-franchise club as a meaningful distinction.
Nowitzki, 39, averaged 14.2 points on 43.7 percent shooting last season, his least-productive statistical campaign since his rookie year. He played in only 54 games, missing extended stretches due to soreness in his right Achilles tendon, and transitioned to playing primarily center after spending his career essentially introducing the concept of a stretch power forward to the NBA.
The Mavs have failed to win a playoff series since their 2011 championship run, even though Nowitzki -- the 2006-07 MVP and 2011 Finals MVP -- signed a hometown-discount deal to provide Dallas management with flexibility to pursue premier free agents. The Mavs finished with a losing record last season (33-49) for the first time since 1999-2000.
Nowitzki surpassing the 30,000-point milestone in a March 7 home win over the Los Angeles Lakers was the highlight of Dallas' disappointing season. He became the sixth member of that club, joining Kareem Abdul-Jabbar, Karl Malone, Bryant, Michael Jordan and Wilt Chamberlain.
Nowitzki enters next season with 30,260 career points, putting him 1,159 behind Chamberlain for fifth on the all-time scoring list, a total potentially within Nowitzki's reach in 2017-18 if he is able to avoid injury.
While Nowitzki has long stated 20 seasons as a significant milestone, he has given no indication that this will be his farewell season. He has repeatedly said he plans to play as long as the game remains fun for him, with his health and the Mavs' competitiveness as factors that could weigh into his decision when to retire.