Murray, who took the reins at the Bet Butler Stadium in November 2012, took Dumbarton to fifth in the SPFL Championship - their highest league placing for 27 years.
Club chief executive Gilbert Lawrie said: “We are delighted Ian has agreed to carry on the excellent foundations he’s built at the Bet Butler Stadium.”
The former Hibs defender was just 31 when he took charge of his first match, a 3-1 loss to Hamilton in the Scottish Cup, but he guided Dumbarton to safety, lifting them from the relegation zone to seventh and picking up the First Division manager of the month award for January 2013.
In his first full season, the Sons just missed out on the promotion play-off positions and reached the last eight of the 2013-14 Scottish Cup.
Murray added: “I’m glad that everything has been sorted and we can now get into the planning process for what will be an exciting campaign next season.”
Jordan Kirkpatrick and Chris Turner are already committed to next season’s campaign, with Murray hopeful of adding to his squad as quickly as possible.