Dallaglio played in all three Tests for the victorious British Lions in South Africa in 1997 and will be one of the key players on this year's tour to Australia.
Other clubs - including Harlequins, Leicester and Bath - have tried to tempt Dallaglio away from the Wasps' back row and an Italian team have always been a distant possibility because of his Anglo-Italian heritage.
Dallaglio's decision will lift a Wasps squad which bowed out of the Heineken Cup at the weekend despite beating Italians L'Aquila 42-5.
Meanwhile, Harlequins, who head to Brive next Sunday for their European Shield quarter-final, plan to turn the Tetley's Bitter Cup Final against Newcastle at Twickenham on 24 February into a "masked ball" for the 10,000 fans.
Quins aim to make their mark in their first appearance in the final for eight years by issuing special masks for their supporters.
