The deal means Jones will remain at the university throughout the 2014 season.
After going 1-11 in his first season, Jones led SMU to an 8-5 record in 2009, the largest turnaround in the nation. He was named Conference USA Coach of the Year by "The Sporting News" after the team's successful season.
"Coach Jones has brought a winning culture to our football program, and under his leadership, I know he will soon exceed my goal for the football program here at SMU -- and that is to be a perennial top-25 team," athletic director Steve Orsini said. "He has more than earned this extension, and we are so happy to have June Jones here on the Hilltop."
The extension announced Friday was agreed on by Jones and Orsini before the final regular-season game last year, even before the Mustangs received a bowl bid.
"I'm very excited about the direction of the program and the university, and I'm happy to sign this extension," Jones said. "I want to thank Steve and President Turner for this and for their help and cooperation in rebuilding our program. Their support and the support of the SMU community will allow us to be successful for years to come."
SMU had not been to a bowl game since the Aloha Bowl in 1984, prior to the so-called "death penalty" from the NCAA for rampant violations that included paying players. The program was not allowed to field a team for the 1987 and '88 seasons.
After it restarted in 1989, there had been only one winning season before last year.
SMU opens its 2010 season Sept. 5 in an ESPN-televised matchup at Texas Tech. Six offensive and seven defensive starters are returning for this season.