The new deal will keep the Dane at the Liberty Stadium until the summer of 2015.
"I am happy here and I never had any doubts I would stay," said Laudrup.
"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."
Laudrup has recently been linked with the job to succeed Jose Mourinho as Real Madrid boss.
Swansea chairman Huw Jenkins said: "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, experience and expertise will ensure we keep moving forward for the next few years."