The 22-year-old’s new deal ties him to the Brightside Ground until the end of 2019.
He said: “I enjoy playing with the guys here and I believe we are capable of achieving a lot more success together – as we showed by winning the Royal London One-Day Cup in 2015.”
Craig came through the club’s Academy and made his County Championship debut aged 16 when he was called up as a late replacement to face Northamptonshire at Bristol in 2011.
A seam bowler and capable lower order batsman he enjoyed his most successful season in 2015 with 46 County Championship wickets at an average of 25.
He also established himself as a key bowler in one-day cricket and was a member of the club’s 2015 Royal London One-Day cup winning team. His performances that year led to him being shortlisted for the PCA (Professional Cricketer’s Association) breakthrough award.
Craig said he hopes to establish himself as a key player in all forms of the game over the next few years.
He added: “The opportunity to play First Class cricket and in the shorter formats was another big reason behind wanting to stay here.
“I have played fairly regularly in the Championship and 50 over competition but I want to try and play more in the T20. I believe I have the skills to do a job for the side and hope I can nail down a place in the team over the next few seasons.”
Craig has been a part of the ECB’s Elite Player Programme and Potential England Performance Programme and has been tipped as a future international.
In total he has made 81 appearances for Gloucestershire across all formats, taking 229 wickets. A capable lower order batsman he has made five First Class 50s. They include a best of 62 not out in a stand of 137 with Liam Norwell against Worcestershire at Cheltenham in 2014 – a Gloucestershire record for the tenth wicket.
Gloucestershire head coach Richard Dawson said: “It’s great that Craig’s committed his future to the club and we look forward to seeing him continue to deliver in all formats.
“He’s still a young lad with a lot of potential and we are pleased that he’s decided to continue his development at Gloucestershire.”
Craig follows fellow bowlers Matt Taylor, Benny Howell and Liam Norwell in signing a contract extension in the recent weeks.