The Watford academy graduate will now remain with the Hornets until 2013.
Speaking to the club's official website Dyche expressed his delight at tying the 28 year old down for a longer period.
"Lolyd is far more talented than he's given credit for. In fact he's a vital cog in turning the wheels of the football side of the club. I hope he has a great testimonial year and continues to serve the club as he has for a long time."
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