Midfielder Fraughan made eight first team appearances in 2009-10 before spending the second half of the season on loan at Welsh Premier League side Aberystwyth Town.
Born in Liverpool, Fraughan has played for Tranmere since the age of 14.
Rovers boss Les Parry said: “Ryan is a talented youngster who did really well in his loan spell at Aberystwyth Town.
“He is comfortable on the ball, likes to take players on and has an eye for goal and I’m pleased he will be with us again next season.
“It’s a credit to the club’s youth system that another player who has come through the ranks has reached first team level.”
Tranmere have also rewarded the progress of teenage prospect Ash Taylor with a one-year contract extension which will keep him at Prenton Park until June 2012.
The 19-year old, who can play in defence or midfield, made 41 senior appearances in his first full season as a professional with Rovers.
Parry added: “Ash did really well for us last season and I’m delighted we have been able to extend his contract. He’s versatile, hard working and enthusiastic and he deserves this extension.
“He is yet another great example of the talented youngsters the club has developed through its Centre of Excellence and youth system.”
Taylor has been with Tranmere for 10 years, progressing through the junior and youth teams before signing a full pro contract in December 2008.
After impressing during the early part of season 2008/09, he extended his contract in August 2009.
He has also been capped by Wales at under-19 level, was also recently selected for the Wales under-21 squad and was voted young player of the season by Tranmere supporters.