The 40-year-old, who originally joined the club in October 2009 as chief scout, was promoted to assistant manager at the start of the season, before he was appointed manager following the departure of Richard Money in March.
Brabin, who has had a spell in charge of Cambridge United, where he was named Conference Manager of the Year, led Hatters to the play-off final this season, where they were eventually beaten on penalties by AFC Wimbledon.
Town’s managing director Gary Sweet said: “We are very happy that Gary will continue in his role. We all know what the target is and Gary is now making plans for next seasons campaign.
“He will have the full support of the board in order to achieve the goal everyone wants and we wish him every success.
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“We all look forward to working with him over the next two years.”