Mr Carney said he would stay in post until the end of June 2019 but has opted against serving a full eight-year term.
The decision means he will cover the full two-year period of Britain’s Brexit negotiations, if Prime Minister Theresa May stands by her pledge to trigger Article 50 by the end of March next year.
In a letter to Chancellor Philip Hammond, Mr Carney said: “By taking my term in office beyond the expected period of the Article 50 process, this should help contribute to securing an orderly transition to the UK’s new relationship with Europe.”
Mr Carney said he had taken the decision because he recognised “the importance to the country of continuity during the UK’s Article 50 negotiations”.
“I clearly signalled my intention to serve for five years. As testified to Parliament, that intention was driven by personal, family considerations,” he wrote to Mr Hammond.
“In addition, I believed that five years would allow a reasonable timeframe to remodel the Bank to reflect its new, much broader responsibilities, and to complete the most important elements of the domestic financial reform agenda.”
He added: “Since then, my personal circumstances have not changed but other circumstances clearly have, most notably the UK’s decision to leave the European Union.”
The pound held steady against the US dollar and the euro immediately after the announcement, with sterling up 0.3% against the US dollar at 1.223 and 0.2% against the euro at 1.114.
Mr Carney had faced mounting speculation that he was preparing to stand down early amid complaints he went too far in warning of the economic dangers of leaving the EU in order to bolster Remain during the referendum campaign.
When he took up the post in 2013, it was agreed that Mr Carney would serve an initial five-year term with the option of another three years.
Responding to the governor’s letter, Mr Hammond said he was “very pleased” that Mr Carney had taken the decision to serve until the end of June 2019.
“This will enable you to continue your highly-effective leadership of the Bank through a critical period for the British economy as we negotiate our exit from the European Union,” he added.
“I am grateful for your contribution to both monetary and financial stability to date, and I look forward to your continuing contribution in the future.”
Mr Carney had met with Mrs May at 10 Downing Street earlier on Monday as speculation mounted over the governor’s future.
Asked before the announcement whether Mrs May wanted him to stay on, the PM’s official spokeswoman told a regular Westminster news briefing: “The Prime Minister has been clear in her support for the governor and the work he is doing for the country.
“It is clearly a decision for him but the PM would certainly be supportive of him going on beyond his five years.”
Pressed on whether Mrs May saw the governor as “the right man for the job”, the spokeswoman replied: “Absolutely.”
Leading pro-Brexit Tory MEP Daniel Hannan warned that if Mr Carney remains in his post he must stop acting like a “rock star”.
Following the announcement, a spokesman at Number 10 said: “The Prime Minister welcomes the Governor’s decision to stay on beyond his initial five year term.
“This is good news for the UK. It will provide continuity and stability at the Bank of England as we negotiate our exit from the European Union and look to take advantage of the opportunities that Brexit will present.”
Andrew Tyrie, who chairs the parliamentary Treasury committee, said the “much needed clarification” was welcome.
“The less uncertainty the better. Still, the Treasury committee concluded in November 2011 that a non-renewable term of eight years for the post of governor was appropriate.The Government agreed, and changed the law in the Financial Services Act 2012, in line with the recommendation.
“In making this announcement, the Government and the governor are sticking neither to the timetable set out in the exchange of letters, nor returning to the statute.
“More uncertainty needs to be avoided. So the decision requires a good deal of examination and explanation, which the committee will seek when it next sees the Governor in a fortnight.”
Shadow Treasury chief secretary Rebecca Long-Bailey said: “Labour welcomes the decision by Mark Carney to ignore the briefings against him from senior Tories in the past few weeks and to stay on as governor of the Bank of England.”
“The attempts by Conservative politicians to scapegoat Mark Carney would be laughable if they weren’t so shameless.”