Lance Young, Paul's agent, said Paul agreed to a three-year extension with a player's option for a fourth year. The total value of the deal is $68 million.
Paul, who recently completed his third NBA season and has been selected to play for the United States in the Olympics, has one season remaining on his current contract. Under league rules, the first day the Hornets can formalize Paul's new contract is July 9.
Paul and Young met with Hornets general manager Jeff Bower at the team's training center in suburban New Orleans on Wednesday, but Young, who is based in the Washington, D.C., area with the sports management and marking company Octagon, flew home Thursday morning without the final details nailed down.
Young said he had a conference call with Bower in the afternoon and a final agreement was reached a few hours later.
The Hornets will pay Paul the maximum allowable under the NBA's collective bargaining agreement, starting at 25 percent of the salary cap for the first year of the extension, with 10 percent raises thereafter.
Last season, Paul led the NBA with averages of 11.6 assists and 2.7 steals. He was the Hornets' second-leading scorer, averaging 21.1 points in helping the Hornets reach a franchise-record 56 regular season victories.
His performance landed him in his first All-Star game, which was hosted by New Orleans.
Paul's play on the court, combined with his charismatic presence at numerous community events, may have saved pro basketball in a city that was in danger of losing its professional teams after Hurricane Katrina struck in August 2005.
The New Orleans Arena routinely sold out during the second half of last season and the playoffs.
The Hornets also have sold more than 5,000 new season tickets for next season. The Hornets now have about 10,000 season-ticket holders, the most they've had since moving to New Orleans from Charlotte for the 2002-03 season.
With Paul's future in New Orleans secure, the Hornets expect to be busy in free agency, having traded their only draft choice last week to the Portland Trail Blazers in exchange for $3 million, which they intend to spend on a proven player.
The hope is that top available players will seize the chance to join Paul, a proven playmaker who has helped teammates David West and Tyson Chandler flourish while leading the Hornets to within one victory of reaching the Western Conference finals.