The club legend returned to Old Trafford in December, after Jose Mourinho sacking and has since then led his side to 14 wins from 19 games.
His deal is said to worth around £7million a year, less than half the £18m basic the club were understood to have been paying the Norwegian's predecessor Jose Mourinho.
'From the first day I arrived, I felt at home at this special club,' said Solskjaer in a statement on the club website.
'It was an honour to be a Manchester United player, and then to start my coaching career here. The last few months have been a fantastic experience and I want to thank all of the coaches, players and staff for the work we've done so far.
'This is the job that I always dreamed of doing and I'm beyond excited to have the chance to lead the club long-term and hopefully deliver the continued success that our amazing fans deserve.'
Solskjaer added: 'It's truly an honour, I have spoken about it in the last few months, it is the dream job for any football-interested man, for anybody involved with Manchester United.
'I have been given the opportunity now to move the club forward. With all the potential there is, it is fantastic.'
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