Donadoni has been in charge of the club since being appointed in October 2015 following the sacking of Delio Rossi and he led Bologna to 15th place last season.
The 53-year-old’s assistant coaches have also agreed new terms to commit their future to the club.
Donadoni is a former coach of the Italian national team, leading the Azzurri to the quarter-finals of Euro 2008, with Napoli, Cagliari and Parma among his previous clubs.
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