The 58-year-old former Germany striker moved to Wolfsburg in November 2012 following a lengthy spell in a similar role at Bundesliga rivals SV Werder Bremen.
'We're not yet where we want to be'
"I'd like to thank the supervisory board for the trust they've shown in me and the outstanding cooperation we have," Allofs told the club's official website. "It was a big challenge to join Wolfsburg and it remains a big challenge too. After almost three years here we've achieved our first intermediate targets but we're still not yet where we want to be. My aim is to establish Wolfsburg as one of the Bundesliga's best teams and in European competition. Myself, the board and head coach Dieter Hecking are working together to ensure the club develops in all areas."