The new deal will keep the former Middlesbrough manager at the club until 2011.
“FC Twente is an ambitious club as we have shown this season,” said McClaren.
“It is a pleasure to work here alongside a management team and a group of players that want to achieve something.
“I am very pleased with this new deal.”
Twente chairman Joop Munsterman added: “It goes without saying that FC Twente is delighted Steve has decided to extend his contract.
“Both parties are very keen for the technical policy of the club to be continued.
“Steve McClaren is ambitious, FC Twente are ambitious so it fits.”
