He earned his 100th cap for Connacht in the Amlin Challenge Cup against Bayonne this year and his new contract will see him stay at the club until the end of the 2012/13 season.
"I'm really pleased to commit to Connacht, it's been a fantastic season so far and this team is really going places. Being part of this squad has helped me to develop as a player and I am looking forward to playing my rugby here for the next 2 seasons," he said.
Grace was a member of the Ireland Under-20 side that captured the Grand Slam in 2007 and also played for Ireland in the Rugby World Cup Sevens tournament in Dubai.
The former Munster Academy player has signed a two year deal with Connacht and returns to Ireland following a stint with Exeter Chiefs in the English Premiership.
"It's a great opportunity to come back to Ireland and progress my career with Connacht Rugby," said Grace.
"I've had a great chance in Exeter this season and have learned a lot from coaching staff there, but a move to Connacht is a positive step in my career and the chance to play with some of the lads and coaches who I played with at underage level at Ireland is just great."
Head Coach Eric Elwood spoke about the 2 signings:
"We're very happy to be keeping Mike onboard, he's been an integral part of the squad for the last number of seasons and having a senior player with Mike's professionalism and experience commit to the team is a huge boost.
We are also very excited about Eoghan joining us next year, he is a mobile, dynamic ball-carrier and will make an excellent addition to our squad. Eoghan was part of the Ireland U20 squad in 2007 so we know what he is capable of and look forward to working with him."