Hearts had spoken to Peter Houston over the job, with the former Dundee United manager reported to be lined up to take over after Sunday's Hampden clash with St Mirren - but they confirmed on Saturday that Locke would continue in the role.
The club said in a statement: "After considering all shortlisted candidates the board of the club has decided to hand the management role to Gary on a deal until the end of next season, while Edgaras Jankauskas and Darren Murray will continue to assist."
Locke led Hearts to four points from three Clydesdale Bank Premier League games after stepping up from his role as first-team coach when John McGlynn lost his job following four consecutive defeats.
Hearts director Sergejus Fedotovas said: "We considered several people for the job and were close to making an appointment of what we believed to be the best of outside candidates, but it was Gary Locke who scored more points among the board members and now I believe that it is right that Gary, Edgaras and Darren continue to be given an opportunity to build on the work they have begun.
"Gary clearly has the same desire as a coach that he showed as a player for the club and with the support of Edgaras, Darren and the players he has an opportunity to deliver success to the club.
"Our decision provides certainty to everyone through to the end of next season and reinforces the focus we all have in trying to achieve a special chapter in the history of this club on Sunday.''
Locke made 189 appearances for Hearts as a player and helped lift the Scottish Cup in 1998 as club captain, despite missing the final win over Rangers through injury.
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