The 47-year-old replaced Pierpaolo Bisoli at the Stadio Renato Dall'Ara in October 2011 and steered the struggling Rossoblu to a ninth-placed finish last season with a run of four wins from seven games through April and May.
Pioli's role appeared to be in jeopardy this term, however, with the club confined to the lower reaches of the table for much of the first half of the season, but a recent run of good form has fired Bologna into 11th place with nine games remaining.
Pioli told bolognafc.it: "I am very happy. I have always maintained that I am happy in Bologna. I really appreciate the club and its fans who have always supported me, even through difficult times.
"I believe strongly in the work we are doing and we want to continue building what we started a year and a half ago. I'm not thinking about anything else but finishing this season strongly and starting work on the next one."
The former Juventus defender has also managed Parma, Chievo and Palermo in the top flight, with varying degrees of success.
Club president Albano Guaraldi added: "We've laid some great foundations this season and, with great pride and pleasure, the coach has agreed to prolong his deal for another year.
"It is a sustainable arrangement for Bologna that is based on mutual trust."
Bologna can move into the top half of the Serie A table with a positive result at Udinese on Saturday night.