The new deal will keep Favre at Monchengladbach until the summer of 2015.
Favre has recently been linked with the likes of Bayern Munich and Marseille.
“Lucien Favre is exactly the right coach for Borussia and we are delighted that we will continue along the path we have been following with him,” said the club’s director of sport Max Eberl.
Favre said: “I have been holding talks for a long time with the board and the management and I am now pleased with this contract extension and the attractive challenges which lie ahead of us.”
