The 55-year-old has helped transform the club from the brink of insolvency in 2005 to one of Europe's strongest sides over the past two years
Watzke's previous deal was due to expire in December 2016, but he has now penned fresh terms until 2019.
The 55-year-old originally worked together with Dortmund president Reinhard Rauball to help save the club from insolvency in 2005.
Since then, Dortmund have won the Bundesliga twice, the DFB-Pokal in 2012 and reached the final of the Champions League in 2013.
Watzke told the club's official website: "We maintain a trusting relationship at BVB.
"Borussia Dortmund has developed economically [and is] one of the healthiest representatives of European football at the top level.
"I am convinced that we are not yet at the end of our journey and I would like to contribute to this fantastic club in the future."
Rauball added: "Hans-Joachim Watzke has done outstanding work in the past few years. He was an architect of the recent past of BVB, is a builder of the present and will now operate sustainably the development of this great club."