The Italian, 64, led the Leicester to their first Premier League title in his first season with the club.
"The energy that exists here - from the owners and the staff, to the players and supporters - is something very special," Leicester City club site.
"Last season, that spirit and our hard work helped us to achieve something magical. If we can continue to work hard, maintain our passion and continue to fight with all our hearts, I am sure we can continue to be successful together."
Leicester shocked teams by winning the league last season with odds of 5000-1, they will now feature in the Champions League draw.
Aiyawatt Srivaddhanaprabha, vice chairman said: "Twelve months ago, we brought to Leicester City a man whose knowledge and experience, we felt, could lead us into the next phase of our long-term plan.
"What he would go on to help us achieve, in the time we have achieved it, has been beyond anything we could have anticipated."