The former Stoke City boss entered a short-term deal with the Saints in March and went on to guide them to Premier League safety in the final two matches of the season.
To reward the Welshman for helping them avoid relegation, the club have retained his services along with his backroom team of assistant first-team manager Mark Bowen and first-team coach Eddie Niedzwiecki.
"Mark and his team had a massive impact from the first day on the players, staff and fans alike, and was able to pull together everyone involved with the club to deliver the results needed," said the club in a statement posted on their official website.
"It is important now, under Mark's leadership, for everyone to move into the new season with a renewed focus and energy alongside the continued and valuable support of our fans."
The Saints ended the 2017-18 season in 17th place in the Premier League, three points above the dropzone.