Tabarez, who also coached Uruguay at the 1990 World Cup in Italy, signed a new four-year contract at Uruguayan Football Association (AUF) headquarters on Friday.
"This (contract) gives us the possibility of continuing the job we want to be involved in. It's also a life choice, we wanted to be in our country because we wanted our challenges here," Tabarez said on behalf of his coaching staff.
"We have a clear plan and lots of faith," he told a packed news conference.
The AUF had been negotiating terms with Tabarez since July when Uruguay returned from South Africa where they reached the World Cup semi-finals for the first time since 1970.
Players including forward Diego Forlan, voted best player at the finals, urged the AUF to keep Tabarez in the job after he revolutionised the national team set-up during the four years he was in charge.
Tabarez will now begin to prepare his team for the Copa America in Argentina next July. The South American qualifiers for the 2014 World Cup begin later next year.
Brazil is the scene of Uruguay's greatest achievement when they upset the host nation 2-1 to win their second World Cup in 1950. They won their first title at home in the inaugural finals in 1930 when they beat Argentina 4-2.
