The deal will ensure the 25-year-old midfielder remains with the Sky Blues until the end of the 2019/20 season.
Coach Steve Corica said the best is yet to come from Retre who was rewarded for a series of solid performances in the A-League and AFC Champions League.
“Paulo is an exceptional talent and he proved that last season when he came into the side," Corica said.
“He has a lot more development to come and I think he is going to continue to improve this season.
“Over the next couple of years I expect we will see the best of him and he will become a crucial member of our squad.”
Retre made 29 appearances for the club in all competitions. His father Carlos played in the National Soccer League for Footscray JUST.
“This is a fantastic club, with some fantastic people and I couldn’t be happier extending my time with Sydney FC,” Retre said.
“The future is extremely bright and I’m excited at what lies ahead for both myself and the club.
“I’d like to thank Steve and the rest of the coaching staff for their support and of course our fantastic members for being behind us all the way.
“I can’t wait for the season to start and I am looking forward to defending our FFA Cup and Premiers Plate titles.”