The future of Coleman, 43, had been in doubt after the FAW chose to hold fire on a new deal following September defeats to Macedonia and Serbia during a disappointing World Cup effort.
But the Dragons finished the campaign with a win over Macedonia and an excellent draw in Belgium, despite having a squad decimated by injury, and recent talks over an extension progressed positively.
The FAW confirmed Coleman's deal at a press conference in Cardiff on Friday, where he was flanked by president Trefor Lloyd Hughes and chief executive Jonathan Ford.
The former Fulham boss said: "People have spoken about whether I would sign a new deal, but I am delighted to extend it and I am looking forward to the challenges that will come.
"I have two years of experience in the job and we will be better for it.
"I am delighted to have been given the opportunity, by Trefor and Jonathan and the FAW council, to lead my country into the next campaign and I am looking forward to it."
Coleman had also been linked with the vacancy at Crystal Palace, but claimed he was never tempted to take the job and was not approached by the Selhurst Park club.
"The honour of doing the Welsh job is bigger than with any job I will ever do," he said.
"It has been really hard at times but at other times it has been fantastic and I don't want to hand that feeling on to someone else. I want to finish what I started with these players."