Gareca, who was born in Argentina, has been celebrated as a national hero by many in Peru since leading the team this year back to the World Cup for the first time since 1982.
The new contract can be extended for an additional year if Peru qualifies for the 2022 World Cup, Gareca said.
Gareca's decision will likely come as relief to the Peruvian Football Federation (FPF), whose president, Edwin Oviedo, has been under pressure to resign over accusations he gave World Cup tickets to a judge who helped exclude him from a murder probe.
Last week, the FPF's sports director warned that the scandal surrounding Oviedo, who denies wrongdoing, could derail Peru's bid to persuade Gareca to remain as the national team's coach.
Gareca thanked Oviedo and the FPF for placing their trust in him. "We truly hope that everything can be cleared up and get better for the good of soccer," Gareca said in a news conference.
Gareca, who is credited with building confidence in a team long seen as an underdog, said he would work toward ensuring Peru plays in the 2022 World Cup. Peru had one win and two losses in the 2018 World Cup in Russia.
(Reporting by Mitra Taj; Editing by Paul Simao)
