according to this
espn report he won't sign an extension in New Jersey. He'll play for them, but they run the risk of losing him in free agency this summer just like Denver. Also it's worth noting that a previous report (can't find it now, will look for it later) claimed New Jersey would do the trade without Melo signing the extension, but wouldn't include Favors or Lopez without the extension.
This is likely why they pulled off the trade today to get these first round picks, so they have a good enough offer to get melo without giving up their young core. Problem with that is they're giving up a lot of picks, hoping that Melo decides NJ is an ideal situation.
As far as the extension goes, it's likey not to effect Melo. Sign the 65 million dollar extension, but when the labor situation is settled, the players will likely take a pay cut.