"BFU's president Borislav Mihaylov and Luboslav Penev concluded their negotiations, reaching an agreement to extend the coach's contract," the BFU said in a statement.
"We are delighted to announce the signing of the new deal and we are looking forward to the Euro 2016 qualifiers."
Under Penev, Bulgaria were second for most of the 2014 World Cup's qualifying campaign but losses to Armenia and Czech Republic in their final matches meant the team, who have not reached the finals since 1998, missed out on a Brazil berth.
Penev was appointed as national coach in November, 2011, replacing German Lothar Matthaeus, whose contract was not renewed following Bulgaria's dismal Euro 2012 qualifying campaign.
The 47-year-old, who led Litex Lovech to the Bulgarian league title in 2011, is known for his hardline approach to discipline and bringing through young players.
Former CSKA Sofia coach Penev was once described by ex-England coach Terry Venables as "one of the top three forwards in the world", boasting a remarkable scoring record in Spain where he netted more than 150 goals for Valencia, Atletico Madrid, Compostela and Celta Vigo.
He is remembered in Spain for his poacher's instinct in the penalty box and for guiding Atletico to a domestic double in 1996 with the Bulgarian scoring 32 goals in 44 games that season.
(Reporting by Angel Krasimirov. Editing y Patrick Johnston)
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