The manager had appeared to be on the verge of leaving Upton Park in the face of a supporter backlash over his style of play, but he has agreed to work alongside a new coach
It had looked increasingly likely that Allardyce would leave the Hammers following the conclusion of the Premier League season, having received strong criticism from large sections of the club’s support during the final months of the campaign.
The situation threatened to come to a head at the end of March when Allardyce’s team were booed off despite beating Hull City 2-1 at Upton Park, leading the former Bolton boss to cup his hands around his ears in a display of surprise and defiance.
Supporters had called for a more adventurous manager to be installed in Allardyce's place, but they will not get their way.
Instead, the club have vowed to "invest considerable funds" this summer, as well as recruiting "a new attacking coach to complement the existing coaching set-up" and "overhaul the existing scouting and recruitment operation that will see the board have a greater involvement in the players who are signed".
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"Sam was asked to give us a detailed presentation on his vision for next season and during this he assured us that he can deliver that ethos to West Ham United and we have agreed to support him with the resources that he needs. We have mapped out a way forward with him that will ensure our much-deserving fans have more to cheer about next season."
Allardyce was appointed as Avram Grant's replacement in June 2011 after the Israeli had guided the club to relegation to the Championship.
The former Blackburn manager, who had been sacked at Ewood Park by the Venky's regime, pledged to get the Hammers back into the top flight playing football according to the club's philosophy.
"That history that West Ham have, I am very well aware of, and we will play the West Ham way with the players we have got to achieve the ultimate, and that's winning football matches," he said at the time. "
"It will be a tale of home and away. At Upton Park we'll attempt to play the kind of passing game the fans want. We will aim to continue the same on our travels but we'll also be hard to beat."
Following a goalless draw at Stamford Bridge in January, Chelsea boss Jose Mourinho had accused Allardyce's side of playing "19th-century football". The Blues had had 39 attempts at goal to West Ham's one, but could not find a way past goalkeeper Adrian.