The 24-year old former Arsenal combative midfielder was signed from Exeter in the summer of 2012 for a tribunal fee of £125,000 and has made 184 appearances in League 1, including 59 for Stevenage.
Last season Dunne made 45 appearances for the Club and scored six goals, one of which was this strike against Doncaster in January 2013. He was also voted the Club's Player of the Season for 2012/13.
Chairman Phil Wallace said, "James hasn't settled in Graham Westley's squad and we need to move on now the transfer window is open."