The former Saddlers player took charge in January 2011 and helped fight off relegation in his first two seasons.
With the club currently in 13th in the League One table, the board have tied him down to a deal that will run until the end of the 2014/15 campaign.
"We felt that it was important to move quickly and decisively to bring stability to the club and give those tasked with executing our philosophies the necessary security to enable them to effectively plan for the future," chief executive Stefan Gamble told the club's official website.
"Dean can now begin to plan for the remainder of the campaign and beyond in the knowledge that he has the club's full backing and the resources to be able to do this."
Smith added: "I am delighted that the club has offered me this new deal and I am only too pleased to pledge my future to Walsall FC. Having this deal allows me to continue to plan ahead and build."