Gruden, who turned 50 on Saturday, had two years left on the five-year contract signed in January 2014. Full terms of the deal were not announced, but the reported two-year extension will take him through the 2020 season.
Gruden has a regular-season record of 21-26-1 in three seasons with the Redskins, including winning the NFC East title in 2015.
After a four-win campaign in his debut season in 2014, Gruden led the Redskins to back-to-back winning seasons in 2015-16, the team's first since 1996-97.
Last season, the Redskins posted franchise records in total net yards (6,545), net passing yards (4,758) and yards per play (6.40), ranking in the top 3 in the NFL in all three categories. The distribution of the offensive contributions allowed eight Redskins players to finish the season with at least 500 yards from scrimmage, tying the 2011 New Orleans Saints for the most in a single season in NFL history.
In 2015, Gruden led the Redskins to a 9-7 record and the 15th division title in franchise history, completing the second "worst-to-first" turnaround in team annals. That year, he became the sixth coach in team history to lead the Redskins to a playoff berth within the first two years at the helm, joining Ray Flaherty, Dutch Bergman, Dudley DeGroot, George Allen and Joe Gibbs.
Gruden is the first head coach to receive a contract extension under Redskins owner Dan Snyder, who purchased the team in 1999. Snyder has employed eight head coaches.
The extension was struck Saturday night at dinner in Indianapolis, where the NFL Scouting Combine has been taking place, while Gruden celebrated his birthday.
The Redskins also are hoping to sign quarterback Kirk Cousins to a long-term deal before the July 15 deadline. The club placed the exclusive franchise tag for the second time on Cousins (guaranteeing him a $23.94 million salary for 2017) last week.