The agreement will provide "for the opportunity of Coach Joe Paterno leading the football program through the 2011 season," the statement said. JoePa turns 82 on Sunday.
"It was also agreed that the parties might reevaluate their circumstances and alter the arrangement by either shortening or extending its length as necessary," the statement said.
The agreement ends months of speculation about Paterno's future since his current deal had expired following this season. University president Graham Spanier and Paterno had announced in the spring that Paterno didn't need something in writing to stay on a job he's had a record 43 years.
Yet contract questions still dogged both sides until Nov. 22, when Paterno said after the Big Ten title-clinching win over Michigan State that he planned to return in 2009.
He had hip replacement surgery the next day. Back on his feet and easing back into his coaching routine, Paterno told reporters last week that he wasn't worried about getting an extension done before the No. 6 Nittany Lions play No. 5 Southern California in the Rose Bowl on New Year's Day.
"If we can work out something that they are comfortable with and I'm comfortable with before the bowl, fine," Paterno said. "I just get tired of recruits asking me, 'How long are you going to be there? But most of them are fine."
Terms of the extension were not announced.
Records released by the State Employees Retirement System last year put his 2007 salary at about $512,000. The state data did not reflect other sources of compensation such as bonuses or outside income.
By salary alone though, Paterno's contract is nowhere close to those of other big names such as Alabama's Nick Saban, the highest paid coach at $4 million a year.
As for his health, Paterno has said he is feeling fine and that rehab is going well. He's eager to get back to the sideline, where he hasn't coached from since late September.
Paterno stayed vague about how much longer he thought he could coach.
"There's no reason for me not to think that I can go for a while," he said. "Now how long is a while? I don't know."
Counting Paterno's 16 seasons as a Penn State assistant before taking the head-coaching job in 1966, the 2009 campaign would be JoePa's 60th year on the Nittany Lion coaching staff.
Also Tuesday, Penn State sophomore Aaron Maybin was selected a first-team AP All-American. The defensive end is fourth in the nation with 12 sacks.
Center A.Q. Shipley was picked to the second team, while guard Rich Ohrnberger and receiver and return man Derrick Williams were named to the third team.