A league source, speaking on the condition of anonymity because the club does not make salaries public, said the deal is worth $12.75 million.
Acquired off waivers from the Stanley Cup champion Anaheim Ducks last Nov. 17, Bryzgalov has played a crucial role in the Coyotes' surprising surge into contention for a playoff spot in the Western Conference.
"I chose to stay in Phoenix because I love our fans, my teammates and I'm confident that we have a bright future ahead of us," Bryzlagov said Tuesday in a news release announcing the signing.
The 27-year-old Russian has appeared in 28 games for Phoenix, going 16-10-2 with a 2.33 goals-against average. Counting his time with Anaheim early in the season, Bryzgalov is 18-13-3 with a 2.38 GAA.
He has an NHL career record of 43-33-10 with a 2.44 GAA in 97 games.
Bryzgalov won his first four games with the Coyotes.
"He's a world-class goaltender with a Stanley Cup on his resume and has been a great addition to our hockey club," general manager Don Maloney said. "We are thrilled to have him in a Coyotes uniform for the next three years."
With Bryzgalov, Phoenix has improved to four games above .500 with 52 points, three points out of the final playoff position in the Western Conference. The Coyotes, in their third season under coach Wayne Gretzky, haven't made the playoffs since 2002.
The signing is a significant change for the financially strapped franchise, which reportedly expects to lose $30 million this season. The team shed payroll in trades last season and decided to go with its young talent this year.
The goaltending position was up for grabs through the preseason, and the Ducks' decision to waive Bryzgalov worked out well for Phoenix.
Bryzlagov appeared in five playoff games for Anaheim last season, posting a 3-1-0 record with a 2.25 GAA.
But when Anaheim signed Jean-Sebastien Giguere to a four-year contract extension, it was apparent Bryzgalov was headed elsewhere. When no trade could be made, the decision was made to waive him.
"We are very happy for Ilya," Anaheim general manager Brian Burke said at the time. "He's a great kid who deserves a chance to be a starting NHL goaltender."
Bryzgalov was part of Russia's 2002 bronze medal Olympic team and played three games for his home country in the 2004 World Cup. He was Anaheim's second-round draft pick -- the 44th selection overall -- in 2000.