News of McLeish's decision to extend his stay comes on the morning the club announced the departure of 'football consultant' Sammy Yu.
McLeish joined Birmingham in November, 2007, and guided the club to ninth at the end of last season - their highest finish in 51 years.
A statement on the club website said: "Club president Carson Yeung has rewarded that success with a new improved deal for McLeish, after giving the green light for him to bring in Ben Foster, Nikola Zigic, Enric Valles, Matt Derbyshire, Alexander Hleb, Martin Jiranek and Jean Beausejour in the August transfer window.
"That followed the acquisitions of Craig Gardner and Michel in January."
McLeish later admitted it was a "bitter-sweet day" after finally putting pen to paper on the deal.
The Scot was delighted to finally conclude negotiations which had started before the end of last season.
But the edge was taken off the announcement with Birmingham crashing 3-1 at West Brom in the Premier League after a mistaken-laden Hawthorns display on Saturday.
McLeish had less than a year left of his remaining deal, although a new 12-month rolling contract would have taken effect from next summer had a new deal not been agreed.
McLeish said: "It is a bitter-sweet day given the fact we have lost. But it is great to sign the contract at last.
"I look forward to the continued development of the club and the team.
"I don't want to talk about the details, they are private, but the club have now got better security. All parties are happy, that is the main thing."