Over the past six months, Dyche has been linked with both Crystal Palace and Everton, but the decision has been made to remain at Turf Moor until 2022.
Dyche has established Burnley as a top-10 club this season, but the long-serving manager has acknowledged that he will face more challenges during the next stage of his career.
The 46-year-old told the club's official website: "I am quite young in management terms. I am still learning and still improving, I believe, so for my personal reasons, as well, I think it's the right place to be.
"It's a very good environment and I enjoy it and I enjoy the connection I've had with this area.
"I think we are still moving forwards as a club and that's important and also I'm aware of some of the challenges."
During his time at the North-West outfit, Dyche has won 97 of his 245 matches in charge and won two promotions to the top flight.