Watzke's previous deal was due to expire in December 2016, but he has now penned fresh terms until 2019.
The 55-year-old originally worked together with Dortmund president Reinhard Rauball to help save the club from insolvency in 2005.
Since then, Dortmund have won the Bundesliga twice, the DFB-Pokal in 2012 and reached the final of the UEFA Champions League in 2013.
Watzke told the club's official website: "We maintain a trusting relationship at BVB.
"Borussia Dortmund has developed economically [and is] one of the healthiest representatives of European football at the top level.
"I am convinced that we are not yet at the end of our journey and I would like to contribute to this fantastic club in the future."
Rauball added: "Hans-Joachim Watzke has done outstanding work in the past few years. He was an architect of the recent past of BVB, is a builder of the present and will now operate sustainably the development of this great club."
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