It means the former Fulham boss will be in charge for the UEFA EURO 2016 qualifying campaign, despite a largely disappointing FIFA World Cup™ qualifying campaign, which ended last month.
The 43-year-old's position as manager had been considered in major doubt but a win over Macedonia and draw with Belgium last month seems to have swayed opinion.
Those results ensured Wales avoided finishing bottom of Group A, something which they had looked set to suffer following September defeats to Macedonia and Serbia.
The FAW confirmed Coleman's deal at a press conference in Cardiff on Friday, where he was flanked by president Trefor Lloyd Hughes and chief executive Jonathan Ford.
"People have spoken about whether I would sign a new deal but I am delighted to extend it and I am looking forward to the challenges that will come," said Coleman. "I have two years of experience in the job and we will be better for it.
"I am delighted to have been given the opportunity, by Trefor and Jonathan and the FAW council, to lead my country into the next campaign and I am looking forward to it," Coleman continued.
"The honour of doing the Welsh job is bigger than with any job I will ever do. It has been really hard at times but at other times it has been fantastic and I don't want to hand that feeling on to someone else. I want to finish what I started with these players."