Guidolin took over in January when the club were flirting with relegation, but 21 points from his 13 games in charge has put the Welsh side 11th with one game left.
He had joined on a short-term deal that ran until the end of the season but has now been rewarded with a longer contract.
"Francesco fully deserves the chance to continue his good work into the new campaign," chairman Huw Jenkins said on the club's website (www.swanseacity.net).
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
"He was prepared to come into the club at such a difficult time and put himself in a pressure situation with the club fighting for survival."
Despite Guidolin's success in leading the club away from the relegation battle, there had been media speculation that Swansea would appoint a new manager in the close season. Former boss Brendan Rodgers was strongly linked with a return.
"There has obviously been a lot of speculation over recent weeks about a possible change of manager, but the board has been impressed with the way he has quietly gone about the job of improving performances and results since January," Jenkins added.
Guidolin arrived at Swansea having coached a number of clubs in Italy. He led unfashionable Udinese to third place in Italy's Serie A, the club's highest finish, and helped Parma, Palermo and Vicenza win promotion.
A former midfielder, Guidolin guided Vicenza from Serie B up to Serie A, won the Italian Cup with them in 1997 and lost a UEFA Cup Winners' Cup semi-final against Chelsea in 1998.
The Swans host fourth-placed Manchester City at the Liberty Stadium in their last game of the season on Sunday, with the visitors needing at least a draw to guarantee a Champions League spot.
(Reporting by Nivedita Shankar/Toby Davis; editing by Ken Ferris and Ed Osmond)
