Dyche is the third-longest serving manager in the Premier League, behind his Clarets predecessor Eddie Howe - now at Bournemouth - and Arsenal's Arsene Wenger.
The 46-year-old marked five years in charge of Burnley last October and, should he stay to the end of his new deal, he will have been at Turf Moor for a decade.
But Dyche believes he still has more to offer the club, after leading Burnley to two promotions from the Championship and keeping them in the Premier League last season.
"I am quite young in management terms," Dyche told Burnley's official website.
"I am still learning and still improving, I believe, so for my personal reasons, as well, I think it’s the right place to be.
"It's a very good environment and I enjoy it and I enjoy the connection I've had with this area.
"There's lots of work to be done, but I'm definitely 'in' for the work to be done."
The new contract reportedly makes the former Watford manager the best paid employee in Burnley's history, earning £3.5million a year, while Dyche's assistant Ian Woan and the club's first-team coach Tony Loughlan have also agreed fresh deals.
Dyche's side, who are next in action on January 31 at Newcastle United, are eighth in the Premier League despite a seven-game winless run.