In his first year at the helm, the 62-year-old has guided the Mets to a 76-84 record, good enough for fourth place in the NL East.
"Terry has done an excellent job of leading and motivating this team with his preparation, energy and enthusiasm during a challenging season," said Mets general manager Sandy Alderson. "He has developed strong relationships with our players and the club's resiliency is a testament to Terry's approach. We are confident Terry is the right man for the job as we build a winning and contending team for the future."
Collins spent the 2010 season with the Mets as the organization's minor league field coordinator. He was hired on a two-year deal with a contract option back in late November.
He holds a 520-518 career managerial record in parts of seven seasons with Houston (1994-96) the Angels (1997-99) and the Mets.
The Mets haven't been to the playoffs since 2006, when they lost in Game 7 of the National League Championship Series to St. Louis. After that loss, New York blew first-place leads in both 2007 and 2008 before the last two years of sub-.500 baseball.