Papas will stay in charge of the Jets until the end of the 2023-24 season under the new deal, which was announced on Friday.
The 42-year-old hopes his commitment will provide the stability within the club to realise his ambitions of making the Jets title contenders.
"It is clear we have made progress over the past 10 months from our initial starting point and yet we are well aware that there remains much room for growth," Papas said.
"I've been clear since day one that I believe the Newcastle Jets have the potential to be one of the biggest clubs in the country and will keep working hard to achieve that.
"This contract extension hopefully provides the certainty required as we move forward together."
Appointed in June last year after time overseas in a variety of roles, including working as an assistant for Ange Postecoglou at J-League club Yokohama F. Marinos, Papas has earned praise for his team's eye-catching style in his first season at the helm.
Despite that the Jets are almost certain to miss out on the finals as they are eight points outside the top six with just three games left.
The season has still been an improvement after Newcastle struggled to avoid the wooden spoon in 2020-21, eventually finishing second last.
Jets' executive chairman Shane Mattiske said they were convinced Papas was the right man for the job.
"We now have a very competitive team which plays with a spirit that aligns with this community," Mattiske said.
"Looking forward, we have real confidence that with Arthur confirmed as our coach for the next two seasons, we are building a team that can compete with the very best and bring real success and pride to this club and this community."
The Jets face Macarthur at Campbelltown Stadium on Sunday.
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