"Marcelo Bielsa will keep working with us until 2015," Chilean Football Federation president Harold Mayne-Nicholls told reporters.
"We have reached a full agreement which has been ratified by the directors. He is very satisfied by this agreement and so are we. We have fully agreed with all the demands he has made to continue this job."
The eccentric Argentine took over as Chile coach in 2007 with the team in a shambolic state.
He rebuilt the side with a group of little-known but talented youngsters, successfully managing to implement an attacking game similar to the style he employed when he was coach of his native Argentina.
Under Bielsa's leadership, Chile qualified for their first World Cup since 1998, finishing second behind Brazil in the 10-team South American group and recording their first competitive win over Argentina in the process.
At the World Cup itself, Chile, fielding one of the youngest teams at the tournament, beat Honduras and Switzerland, their first wins at the finals since 1962, to reach the last 16, before losing 3-0 to Brazil.
Bielsa's new contract will include next year's Copa America in Argentina, the qualifiers for the 2014 World Cup in Brazil, the tournament itself - if Chile qualify - and the 2015 Copa America.
If he sees through the contract, Bielsa, who became Chile's sixth coach in as many years when he was appointed, will have been at the helm for eight years.
