The deal includes a raise for this season and goes through the 2010-11 season, expected to be the team's first in a planned US$290-million arena.
"Michel has done a tremendous job with our team over the past two-and-a-half seasons, developing our young players while leading us to division and conference championships and the Stanley Cup finals," general manager Ray Shero said.
Therrien had one year left on his contract. Though they could have talked about an extension, Shero said that "based on the success we've had together, it was time to negotiate a new deal, starting with an increase in compensation for the 2008-09 season."
Therrien said Pittsburgh "is a great hockey city with an outstanding fan base."
"All of our players comment on how much they love playing in Pittsburgh, and I can tell you that our coaches love coaching in Pittsburgh," Therrien said. "We still have a lot of work to do, though, because we fell short of our biggest goal last season. Our goal is, and always will be, to win the Stanley Cup."
The Penguins lost the title in six games to Detroit.
Therrien had been head coach of the team's American Hockey League affiliate in Wilkes-Barre/Scranton when he was hired midway through the 2005-06 season to replace Eddie Olczyk. The Penguins missed the playoffs that season, but have earned berths in Therrien's two full seasons with the team.
The Penguins have gone 94-51-19 under Therrien. He was a finalist for the Jack Adams Trophy as NHL coach of the year in 2006-07.