Favre's deal had been due to expire next year but the Swiss has now committed to the club for a further two seasons.
After moving to Borussia Park in February 2011, Favre's most notable achievement came in 2012 when he led Monchengladbach to the qualifying stages of the UEFA Champions League.
"Lucien has done outstanding work with us in the past three years," said sporting director Max Eberl. "Our (successful) relegation fight in 2011 and the return to the European Cup in 2012 are most directly associated with his name.
"Our journey together is not over yet, and we are looking forward to further cooperation."
Monchengladbach currently sit eighth in the Bundesliga, despite having not yet won a competitive game in 2014.
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