Several African leaders approved a new 12-month transitional period to begin on November 1 during a meeting at the African Union (AU) headquarters in the Ethiopian capital, Addis Ababa, on Tuesday.
The AU peace and security council said in statement after the talks: "The council decided that during this transition period president Gbagbo shall remain head of state."
In Ivory Coast, thousands of opposition supporters staged an anti-Gbagbo demonstration.
The AU, despite opposition from Senegal, mostly followed recommendations made by Ecowas, the West African regional bloc, after an October 6 summit.
Chief among those was extending Gbagbo's term for another 12 months with some of his powers - including over the military - transferred to Charles Konan Banny, the prime minister, to help implement the peace plan.
The AU said the prime minister should have "all necessary means of power" to implement programmes including voter registration, restructuring the security forces, dismantling militias and completing technical preparations for polls.
UN calls for elections
The United Nations, overseeing the Ivory Coast's stalled transition from a 2002-2003 civil war towards elections, is expected to take up the AU recommendations before Gbagbo's current transition period as president ends on October 31.
Squabbling and violence have blocked progress on a plan to bring peace to Ivory Coast, now divided into a rebel-held, mostly Muslim north and the more Christian or animist south which the government controls.
A UN declaration on Saturday noted that Ivory Coast could not hold elections on time, but said it must do so within a year.
The AU is expected to present its plan to the UN security council for adoption.
The former French colony, once a West African oasis of peace and prosperity, has been unable to organise polls amid feuding over disarmament and identifying citizens eligible to vote.