Collins, 64, just completed his third season as the Mets' manager. The team went 74-88 for a second consecutive season. New York was 77-85 in Collins' first year as manager.
The extension links him to the team through the 2015 season with the Mets retaining an option for 2016.
"Terry has a great passion for the game," General Manager Sandy Alderson said. "He has helped make our younger players better. He's a great motivator. He has had to overcome a lot this year with injuries and trades.
"The club played hard for Terry and I think that was obvious for everyone to see. Of course we aren't where we want to be record-wise, but I think we are on the right course. I think Terry deserved the chance to help us turn things around."
The Mets are the third team Collins has managed. He guided the Houston Astros from 1994-96 and the Anaheim Angels from 1997-99. He is 669-695 in nine years as a manager. His Mets' record is 225-261.
"I'm honored to be able to continue what we have started," Collins said. "The nucleus of young talent in our organization really came to the forefront this year. There is no doubt in my mind that we are headed in the right direction.
"The won-lost record is not what any of us wanted and that's what we have to change, beginning in 2014."