The Football Association confirmed the news this afternoon, bringing a swift end to speculation about the Italian's future.
'I am more determined than ever to succeed with the England team,' said Capello.
Still the boss: Capello will remain in charge of the England team
The decision was taken following a meeting of the four-man ClubEngland board, which decided unanimously to keep Capello, despite theThree Lions' woeful performance at the World Cup.
The full Football Association board subsequently ratified therecommendation, which means Capello will now continue in his £6million-a-year role until the end of Euro 2012.
'Sir Dave Richards has called me to tell me everyone at the FA wants me to continue,' said Capello.
'I explained it is very important we use the disappointment as a motivation in the future.
'I can assure the fans I am now fully focused on our Europeanqualifying fixtures, starting with the friendly against Hungary inAugust.'
Crushed: England players come to terms with the 4-1 hammering from Germany
In the immediate aftermath of England's record 4-1 defeat byGermany in Bloemfontein last Sunday, it was felt Capello would have togo, even though it had not been four weeks since he signed a revisedcontract, removing a break clause that would have taken effect afterthe World Cup.
Yet, within 24 hours, Capello was signalling his intention tocontinue, leaving the FA in no doubt they would be forced into a costlycompensation exercise should they decide to part company with the64-year-old.
Crucially, while many former players, including Alan Shearer,demanded Capello's sacking, those far closer to the action adopted adifferent approach. Bolton chairman - and senior FA figure - PhilGartside, threw his weight behind Capello, which was seen as crucialgiven he is a long-time ally of Club England chairman Sir DavidRichards.
Another member of the FA hierarchy, David Sheepshanks, urgedcaution at virtually the same time as Roy Hodgson, the overwhelmingfavourite to replace Capello, was being installed as Liverpool manager.
Tails between their legs: Players and staff arrive back after the tournament
The FA did have alternative options in Harry Redknapp and Stuart Pearce. But given how much it was going to cost them, Capello's admittedly impressive record prior to the entire World Cup finals campaign, which started badly with the ill-fated 'Capello Index' and got worse virtually by the day, and the need to end the uncertainty, Richards feels the FA have reached the correct conclusion.
'We are all still extremely disappointed at our performance in South Africa, and we believed it was important that we took some time to reflect on everything in a calm and considered manner back in England,' said Richards.
'After fully discussing our performance we remain convinced that Fabio is the best man for the job.
'He went into the World Cup with a reputation as one of World football's finest managers and we are confident Fabio will benefit from his first international tournament experience and this will undoubtedly make us all stronger for the Euro 2012 campaign.'
Contender: Redknapp was touted as a replacement
Although it had been suggested some members of the FA board were unhappy at the way the Club England offshoot had taken full responsibility for the post-South Africa period, acting chairman Roger Burden expressed his support for the move.
He said: 'The FA Board supports this decision. It is the right decision and will allow us now to rebuild for the future with Fabio leading us forward.'
Capello can now continue with the holiday he went on within hours of his arrival back in London, and start preparing for the friendly with Hungary on August 11 and then the Euro 2012 qualifying programme, which starts with a home game against Bulgaria on September 3.
He has already offered a list of players who were not in South Africa who can hope to be involved, including Manchester City winger Adam Johnson, Arsenal trio Theo Walcott, Kieran Gibbs and Jack Wilshere and Fulham forward Bobby Zamora.
'We will look to introduce new players to give the team new energy and I will use all my experience to take England forward,' said Capello.
'I am extremely proud to be the England manager, it means so much to me and I am determined to succeed.'
FA falter on Fabio: Officials can't decide if World Cup flop boss is in or out Defoe insists players are behind Capello despite England failurePostman Cap who failed to deliver - but players are Jess jokingShould England boss Fabio Capello stay or go? We ask the experts.