Olsen, 60, has coached Denmark since 2000. His current contract was set to expire after the World Cup finals in South Africa.
The new contract extends over the Euro 2012 finals to be hosted by Poland and Ukraine. Financial terms were not disclosed.
"It is a vote of confidence that the DBU wanted me to stay on," Olsen said.
DBU secretary general Jim Stjerne Hansen welcomed that Olsen had stayed on, saying he was the closest Denmark has to Manchester United manager Sir Alex Ferguson.
Olsen had a key role in securing Denmark's qualification to the World Cup finals this summer as well as inspiring young talent, Hansen said.
DBU earlier this week said it hoped to get word from Olsen before the Denmark squad heads off for training sessions in Thailand next week.
Goalkeeper Thomas Sorensen, who plays for English Premier League side Stoke City, welcomed Olsen's extension telling news agency Ritzau that it would guarantee that Denmark would continue to play an attacking style of football.
Olsen had in some previous interviews signalled an interest in coaching a club again. He has previously coached Danish side Brondby, Germany's Cologne and Dutch team Ajax Amsterdam.
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