Diouf joined Rovers on an initial three-month deal in October and, amid reports of approaches from big-spending Russian outfit Anzhi Makhachkala and LA Galaxy, news of his new deal is a major boost to Saunders in his side's battle against relegation from the Championship.
"He's agreed to sign for 18 months so that's great news for the club," said Saunders at his Friday press conference.
"He's probably the best signing the club's ever made. He hasn't signed the forms yet but we agreed everything last night and hopefully he's going to sign."
"To be fair to him he's had different offers thrown at him and he's decided to stay.
"He's enjoying his football, he enjoys it at the club, he sees how ambitious we are and sees how ambitious I am - I don't want to managing a team down the bottom, I want to be managing a team at the other end of the table."
Diouf, 30, scored twice in four games for Doncaster before suffering a hamstring injury.
Saunders is also close to securing the services high-profile signings Pascal Chimbonda, Herita Ilunga and Habib Beye until the end of the season.
Former Tottenham defender is on a short-term contract that runs until January while the latter two on extended loan deals from West Ham and Aston Villa respectively.
"Chimbonda wants to sign and Ilunga wants to stay so I'm going to try and do something on that as well," he said.
"I spoke to Pascal on Thursday and he wants to sign. He's enjoying his football as well - and Habib Beye, I'm hoping I can do that."