The 51-year-old guided Forest to a seventh-place finish in the English Premier League last season, securing European qualification for the first time since the 1995-96 season.
For much of the campaign, it looked as though Forest were going to qualify for the Champions League, but they lost five of their last eight games.
However, that has not prevented owner Evangelos Marinakis from rewarding Nuno following the club's highest league finish for 30 years, while they also reached the semi-finals of the FA Cup before losing to Manchester City.
Nuno said: "I am delighted to be able to continue our journey at this fantastic football club.
"Since we arrived at Forest, we have worked extremely hard to create a special bond between the players, the fans and everyone at the Club, which helped us achieve great things last season.
"I would like to thank our owner, Mr Marinakis, for his constant support and backing. It is important to me to share a strong relationship with our ownership and we have thoroughly enjoyed working together ever since I arrived at Forest.
"Now is the time to work harder than ever as we strive for more special memories together."
The former Wolves and Tottenham boss arrived at the City Ground in December 2023 following the sacking of Steve Cooper, and helped the club avoid relegation on the final day of the season.
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