Sparrow had been linked with a move to Championship side Sheffield Wednesday, but he becomes the first player to pen a new deal at Glanford Park - and the club have the option of extending it by another year.
The Wembley-born player, who grew up in North Lincolnshire and came through the ranks at Glanford Park, has been a regular fixture in the Iron's first-team.
He made his debut in the 2-0 loss at Huddersfield in August 1999, replacing Wayne Graves.
This season he has made 35 starts and came off the bench 10 times, scoring five goals in the process.
Throughout his United career he has featured in 244 matches for the first-team.