The Danish boss, who had been linked with the likes of Real Madrid and Chelsea after leading the Swans to League Cup glory, had maintained that he wanted to remain at Swansea, but cast doubt over his future by claiming that he couldn't confirm what lay ahead.
"We've started something this season that I want to continue," Laudrup told the club's official website. "I know there has been a lot of speculation [about my future], but I've always said that I am happy here and I never had any doubts I would stay.
"I am delighted to sign the new deal and I'm already really looking forward to next season. I hope there will be some very exciting things happening with the team and with the club in Europe."
Chairman Huw Jenkins added: "This is a major boost for everyone involved with Swansea City, from the players, staff and board of directors through to the most important people of all, our supporters.
"You can never guarantee how things will work out when you employ a new manager, especially after the success we've had in recent seasons, but I think everyone has seen for themselves that Michael has helped take this football club to another level.
"He is a pleasure to work with because he shares the same philosophy as everyone at this football club. He has ensured that we have progressed again this season and I am convinced his knowledge, experience and expertise will ensure we keep moving forward for the next few years."