The 22-year-old, who has lined up at left-back in the club's most recent games amid a defensive injury crisis, will remain on Wearside until June 2014 under the new agreement.
Tyneside-born Colback has appeared in 20 of the club's 21 games to date this season and scored his first senior goal in the 1-1 Barclays Premier League draw with Everton on Boxing Day.
The Academy graduate followed in the footsteps of Jordan Henderson in forcing his way into former manager Steve Bruce's plans after impressing during a loan spell.
He was voted Ipswich's Players' Player of the Year after spending the 2009-10 campaign, during which he made 41 appearances, at Portman Road.
Colback returned to the Stadium of Light and was handed a Barclays Premier League debut on the final day of the same season when he was introduced as a late substitute in a 2-1 defeat at Wolves. However, his big day ended in disaster when he was sent off following two yellow cards.
He returned to Ipswich on loan the following season, but headed back to the north-east in January 2011 to establish himself in the Sunderland first-team.
Bruce used him regularly in his starting line-up before his departure at the end of November, and after finding himself reduced to the ranks of substitute as new boss Martin O'Neill assessed his options, has once again worked his way back into contention.
Source: PA
Source: PA