General manager Jon Horst said Friday that the team has agreed in principle with Bledsoe on the extension and is moving toward finalizing it.
"We are excited to have Eric continue to be a core part of the team," Horst said.
Bledsoe could have become an unrestricted free agent this summer, but he wanted to play the rest of his prime with the franchise and finalized an extension that will start to set the market for free-agent guards in July.
Bledsoe's agent, Rich Paul of Klutch Sports, and Horst completed the deal Friday, league sources said.
Milwaukee won its seventh straight game to improve its NBA-best record to 48-14.
"Right now, we jellin'," Bledsoe said when asked why he didn't wait until free agency to sign the extension. "I'm around a great group of guys. They like brothers to me. They took me in with open arms last season, and it's paying off right now, so why not?"
Bledsoe, 29, is having his best season in the NBA, averaging 15.9 points, 5.5 assists and 4.7 rebounds per game. He is shooting a career-best 49 percent from the field.
The deal secures one of the Bucks' cornerstone players long-term and allows them to move into free agency with a focus on retaining forward Khris Middleton, who can become a free agent in July.
He was the 18th overall pick in the 2010 NBA draft out of Kentucky.