The new deal will keep him at the Stadium of Light until the summer of 2014.
“I’m delighted to have signed a new contract,” Bruce told the club’s official website.
“It’s a magnificent club from top to bottom, with wonderful support and everything is in place here for a manager.
“We have the makings of a fantastic young team.
“It’s been a great challenge so far and one that my backroom team and I have relished so we’re looking forward to continuing with that over the next few years.”
Chairman Niall Quinn added: “It was hugely important to bring stability to this football club and I firmly believe that in Steve we have the man to do just that.
“In only 18 months he has reshaped our squad beyond recognition, bringing in some fantastically talented players, many of whom are young and desperate to achieve and improve.
“He embodies the ethos of teamwork and the importance of camaraderie in creating a wonderful spirit of togetherness amongst the players and staff.
“As someone born and bred in the North East he fully understands the unique passion for football in this region.
“He has already raised the aspirations of not only the players but also the supporters and instilled a belief in everyone that we can go on to achieve the sustained success that we all crave.”