The Ligue 1 club have yet to make it past the quarter-finals of the Champions League since Qatar Sports Investment (QSI) took over in 2011 although they claimed five of six possible domestic titles with Blanc.
"With him, PSG has more than ever the ambition of ... continuing its climb to the European summits," PSG said in a statement. "All the conditions for stability are met. I have always had a lot of faith in Laurent Blanc," said club president Nasser al-Khelaifi.
Blanc's existing contract was expiring at the end of the season.
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"I want to thank the club for the faith they put in me," said the former France defender, who won the World Cup in 1998.
Blanc joined the club in June 2013, replacing Carlo Ancelotti, one year after ending his term as the Les Bleus coach.
The 50-year-old led PSG to two successive Ligue 1 titles and an unprecedented treble of league, League Cup and French Cup titles last season.
The capital side, who are on a record 34-match unbeaten run in Ligue 1, lead the standings by a massive 24 points after 25 games. They play Chelsea in the first leg of the Champions League last 16 on Tuesday.
PSG, who splashed millions to recruit the likes of Zlatan Ibrahimovic, Thiago Silva and Angel Di Maria over the years, were knocked out in the last eight in the past three seasons.
They suffered their only loss this season in a 1-0 defeat at Real Madrid in the Champions League group stage.
(Editing by Amlan Chakraborty)
