The Swiss moved to northern Germany in February 2011 and managed to save the club from relegation via the play-offs before guiding them to fourth place the following season, although they lost to Dynamo Kiev in the Champions League qualifying rounds.
The Foals are currently without a win in nine Bundesliga games but remain just two points off the Europa League places and sporting director Max Eberl believes Favre is still the right man to guide them forward.
"Lucien has done outstanding work with us in the past three years," he told www.borussia.de.
"Our relegation battle in 2011 and the return to the European Cup in 2012 are most directly linked with his name.
"Our journey together is not over yet, and we are looking forward to further cooperation."
The 56-year-old managed four clubs in his native Switzerland, including FC Zurich before moving to Hertha Berlin in 2007.