The Italian, poised to lead England to this month's World Cup in South Africa, had been linked in Italian and British newspapers with the vacant manager's job at Inter Milan.
The 63-year-old Capello has signed an amended contract which removed a break clause option.
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"We're very pleased to have Fabio's commitment for another two years and it's good that we have been able to resolve this before the team flies to South Africa," Club England Chairman Dave Richards said.
Inter Milan are looking for a new coach following Jose Mourinho's departure for Real Madrid and the Champions League winners' president Massimo Moratti said this week he would be pleased if Capello was available after the World Cup.
"I always wanted to stay until the end of my contract," Capello said. "In South Africa we are totally focused on the World Cup."
The former Juventus, AC Milan and AS Roma coach has transformed England since taking charge after they failed to qualify for Euro 2008, winning 18 of 24 games.
He is preparing the team for the World Cup which starts in South Africa on June 11. England play the United States on June 12 and also face Slovenia and Algeria in Group C.
