"Matthaus will remain Bulgaria coach for two more years," BFU president Borislav Mihaylov told reporters.
"We took the decision before the friendly game in Belarus [a 1-0 defeat in a friendly on Wednesday] and he'll soon sign a new contract," added former Bulgaria goalkeeper Mihaylov.
"We talked about the national team's future, discussed our ideas and I think that both parties were pleased."
The 50-year-old German had signed a one-year contract last September, replacing Stanimir Stoilov following Bulgaria's Group G defeats by England and Montenegro in Euro 2012 qualifiers.
Matthaus enjoyed a promising start with a 1-0 win away to Wales in their next qualifier but Bulgaria's chances of reaching the finals all but vanished following consecutive draws against Switzerland and Montenegro earlier this year.
Matthaus, who became the first foreigner to coach Bulgaria since 1966, recently said he would love the challenge of coaching the team during the 2014 World Cup's campaign.
Bulgaria have been drawn with Italy, Denmark, Czech Republic, Armenia and Malta in Group B and Matthaus knows he has an uphill task trying to get the Balkan country through to the finals in Brazil.
Matthaus, who captained West Germany to success at the 1990 World Cup and won a record 150 caps, enjoyed a glittering playing career with Bayern Munich and Inter Milan.
But he has achieved limited success as a coach with Rapid Vienna, Partizan Belgrade, Brazilian side Atletico Paranaense, Salzburg, Israeli club Maccabi Netanya and Hungary.
