The 60-year-old, who is also interim coach of the Turkish national team, is in his third stint in charge at Turk Telekom Arena and will now stay for a minimum of two more seasons
The 60-year-old is in his third stint in charge of the Turkish giants and has won back-to-back Turkish Super Lig and Super Cup titles since returning in 2011.
Prior to this current spell, he won four titles in a row and a Uefa Cup between 1996 and 2000, defeating Arsenal in the final to clinch European success.
Terim is also the interim coach of the Turkish national team, having replaced Abdullah Avci last month. He has enjoyed two previous spells at the Turkey helm, leading his country to Euro 1996 qualification and the semi-finals of Euro 2008.
He will take on both roles until 2014, when he will leave his job with the national side.