The Uruguayan, 43, guided Brighton to the npower League One title last season and they currently lie fifth in the Championship.
Poyet's assistant, former Tottenham defender Mauricio Taricco, has also agreed a new five-year deal.
Chairman Tony Bloom told the club's official website, www.seagulls.co.uk: "This is great news for the club.
"Gus and Tano are key to all of our immediate and long-term plans. When you consider the position the club was in when they arrived, what they have achieved here in less than two years is outstanding."
Poyet added: "I am delighted to extend my stay here as the last two years have been absolutely fantastic."