The former Norwich and West Brom boss agreed the new deal during the last fortnight and it has already taken effect.
Megson joined Bolton in October 2007 with the team odds-on for relegation but he led them to safety and preserved their Premier League status.
Chairman Phil Gartside told Setanta Sports: "Gary and I get on very well together.
"I know the quality of the work that is going on behind the scenes. He has got a good team behind him, and they have worked hard this year.
"We got into a real transition period, and I think we are beginning to get to the end of that."
Megson has had to endure a rough ride from some supporters, and the chairman is asking for patience.
Gartside added: "We have a generation of fans here who have not known anything but Premier League football, and some of them only top-10 finishes.
"But the majority do understand the work that Gary is doing, and a lot of people are happy with that."