The 36-year-old, who quit playing last summer, steered Leeds' Under-18s to the league title in his first season in charge.
"I'm really pleased," Leeds-born Naylor told the club's official website.
"It's something I wanted to get sorted as soon as possible and now I'm just looking forward to getting cracking again next season."
Naylor, who spent most of his playing career at Ipswich before making over 70 appearances for Leeds from 2009 to 2011, added: "There's a history of the club producing players and that is something that has been focused on in recent years and we're really concentrating on getting local lads in.
"There's nothing more satisfying for the Leeds fans, myself included, than seeing a local lad make his debut and go on and do great things."