The 46-year-old, whose assistant
Mauser added: "He (Labbadia) took over the team at a difficult time, steadily continued to develop it and last season led it into Europe.
"Therefore we are pleased to have tied him to us for longer. Together we still have some plans for Stuttgart."
Labbadia took over at the club in December 2010 after his dismissal by Hamburg earlier in the year.
He led the team to sixth place in his first full season in charge. It lies 11th this term, but just four points off the European places.
Sporting director Fredi Bobic said the coaching team 'have not yet reached their goals and will continue to work for the success of the team as intensively as before'.
Labbadia said: "We want to give the Stuttgart fans a team that is fun and enthusiastic."
Arsenal tightened its grip on fourth place in the Premier League and a UEFA Champions League spot with a domineering 3-0 win over Hull City at the KC Stadium.