Green, 32, will count $5.375 million against the salary cap over the next two seasons. Green is taking a pay cut from his previous $6 million salary to stay with the team.
Green put up eight goals -- seven on the power play -- and 25 assists for 33 points in 66 games before his season was cut short by a neck injury.
He has 142 goals and 322 assists for 464 points in 787 regular-season games with Detroit and Washington, with whom he was a two-time runner-up for the Norris Trophy as the NHL's top defenseman.
After completing one offseason task by locking up Green, the Red Wings are expected to sign a goaltender and be active in adding up front when free agency begins Sunday at noon.
The Associated Press contributed to this report.