"Egil has delivered strong results during his two periods as boss for the national team. He's experienced and knows international football very well," said Nils Johan Semb, the head of elite football, in a statement on the association's website.
"We have considered several candidates, but overall this decision means that we have the best candidate to lead the national team for years to come."
Olsen, 69, who had a successful spell as national team manager from 1990-98, returned to the top job in Norwegian football in January 2009 after a stint as manager of the Iraqi national team.
His contract will take him to the end of the qualifying campaign for the 2014 World Cup. If Norway qualify his contract will automatically be extended until the end of the tournament.
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