The deal follows rumours that Sven was being lined up to take over as Chelsea manager. Reports have also linked him to Real Madrid and Inter Milan.
Sven said he would have liked to have waited until after Euro 2004 before extending his contract.
"But that was more or less impossible with all the speculation," he added.
However, the rumours are not likely to go away.
Reports claim that Sven has a get-out clause in his contract which would allow him to quit after the 2006 World Cup.
The FA has refused to confirm or deny the report.
Meanwhile, Sven is insisting he's staying in the job, saying: "I have a contract until 2008."