The 24-year-old, who progressed through the Dons’ Academy set-up, has committed himself to the Sky Bet Championship newcomers until June 2017.
“It’s been the perfect year for me,” Powell told MK Dons Player.
“It’s been a project of the club’s to get into the Championship and now hopefully I’ll be able to enjoy two more years of playing at that level, if not higher.
“I’ve been here since I was 14, so it’s been a while now. I’ve seen the club grow and grow and to be a part of that is a great privilege.”
Powell has made 217 appearances for the Dons and scored 41 goals.