Wallace has gone on to make 30 appearances for the Premiership champions since graduating through the club's academy.
And the 22-year-old's form last season saw him shortlisted for the LV= 'Breakthrough' and Land Rover 'Discovery of the Season' awards.
"We believe the back row resources at this club are as good as anywhere in Europe and it is hard for young players to secure a regular place in the first team," said director of rugby Conor O'Shea.
"Luke has made that breakthrough and is really pushing hard to start week in, week out. He is driven to achieve that for both Harlequins and at national level and I am sure he will achieve the latter in years to come.
"No doubt his drive will make for some fascinating selections in the coming years and his re-signing shows his loyalty and commitment to the club he has grown up with."
Wallace has set his sights on winning more trophies with Quins.
"I've progressed greatly as a player since I joined Harlequins and given the quality of the coaching staff, I've no doubt I will develop further," he said.
"The club has an environment that encourages young players to progress and I'm benefiting from that. I'm proud to be part of a talented and successful squad and look forward to winning more silverware in coming seasons."
Gilbert has released a new line of rugby cleats. The Gilbert Virtuo 8S is part of the exciting new product. Check it out.
The entire All Blacks apparel line has been updated for 2013/14. Check out the New Zealand All Blacks polo.
The Nike Tiempo is a solid rugby cleat and one of few styles still made from full-grain natural leather.
The Gilbert Blitz 8S rugby cleat is a great cleat at a great price of $69.99. Get a new pair of cleats today.
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Wear the crest of the British and Irish Lions on your t-shirt. A great look for the summer.
The All Blacks Performance t-shirt is black with hints of blue from the training jersey. Very Cool.
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The USA Rugby Pro Alternate rugby jersey is perfect for any fan of the Eagles. Get yours to wear during the summer Test matches.
The NEW All Blacks 2013/14 jersey has arrived at World Rugby Shop. Dare to wear the colors of the All Blacks.