McCarthy took charge of the Tractor Boys in 2012 and steered them clear of relegation, guiding them to 14th in the Championship.
Ipswich then narrowly missed out on a play-off place during his first full season in charge, finishing four points behind sixth-placed Brighton
A statement on the club's official website, www.itfc.co.uk: read: "Mick McCarthy has agreed a new three year contract as manager of Ipswich Town.
"The Blues' boss, who was back at the training ground today for the first day of pre-season training, has been in charge at Portman Road since taking over from Paul Jewell in October 2012.
"He would have been in the final year of an initial two and a half year contract but after discussions with club owner Marcus Evans, Mick will put pen to paper on a contract that will see him remain as Town manager until the summer of 2017.
"Assistant manager Terry Connor has also agreed a new three year deal."
McCarthy has previously won promotion to the Premier League twice as a manager - with Sunderland in 2005 and Wolves in 2009, winning the Championship title on both occasions.
The Black Cats sacked the Yorkshireman during their first season in the top division as they were 16 points adrift of safety.
McCarthy then ensured Wolves maintained their Premier League status for two seasons before the club relieved him of his duties in February 2012 following a run of one win in 13 games, ending a five-and-a-half-year spell at Molineux.
Connor has worked with McCarthy since becoming his assistant at Wolves in 2008
He had a spell as Wolves manager when McCarthy was sacked but then reverted back to the assistant's role when Stale Solbakken was appointed
Connor left Wolves early in the 2012/13 season, linking up with McCarthy again when he joined Ipswich.
Source : PA