Financial terms were not disclosed.
Prior to the start of the 2010 season, Washington admitted he had used cocaine on one occasion a year earlier. He remained on the job and guided Texas to a runaway division title in the AL West, followed by the first two post-season series victories in the history of the club -- beating Tampa Bay in the first round and then topping the New York Yankees in the AL Championship Series.
Texas lost the World Series to San Francisco in five games.
Washington, who received the backing of Rangers President Nolan Ryan after his admitted drug use, is now signed through 2012.
"Nolan and I have said all along that we wanted Ron Washington to be our manager going forward, and today's announcement merely formalizes that extension," General Manager Jon Daniels said. "Washington has done an excellent job leading the club over the last three years and in creating a winning attitude. We look forward to working with him as the club comes together for next season."
In four seasons as manager, Washington has a 331-317 record.