The Senegalese international has become an integral part of Bolton's midfield this season having joined on loan from French side Lens in the summer.
Trotters boss Sam Allardyce has openly praised Faye for his performances and was clearly delighted to have secured his future at the Reebok stadium until June 2008.
Bolton manager Sam Allardyce told his club's official website: "Abdoulaye Faye has been one of the finds in the Premiership this season. He joined us on loan in the summer and with his sheer determination and ability he has forced his way into the team.
"He is arguably our most consistent player of the season so far and loves the physicality of the Premiership."
Faye said: "Sam Allardyce and Bolton Wanderers have given me the opportunity to resurrect my career.
"I had a difficult time in France last season, which resulted in my team [Istres] being relegated from the top flight. To have the chance to draw a line under the past and start again in England is a chance you don't give up.
"The Premiership is by far the most demanding league in the world and it really suits my style.
"To now earn a permanent contract is a dream come true and for me the challenge is to continue with my progression.
"I'm here for the long-haul and it is my ambition to be a player the fans will continue to admire."