The Limerick-born teenager joined the Clarets prior to the 2020/21 season after leaving League of Ireland side Galway,where he made his first team debut aged 15.
And after two successful campaigns in the Under 23s set-up, Costelloe has extended his time in East Lancashire.
The 19-year-old, who finished top scorer with 12 goals in total for the Under 23s last season, was also on the bench for the last seven games of the Premier League season.
Burnley's Irish midfielder Dara Costelloe warms up ahead of the English Premier League football match between Burnley and Southampton at Turf Moor in Burnley, north west England on April 21, 2022. - RESTRICTED TO EDITORIAL USE. No use with unauthorized audio, video, data, fixture lists, club/league logos or 'live' services. Online in-match use limited to 120 images. An additional 40 images may be used in extra time. No video emulation. Social media in-match use limited to 120 images. An additional 40 images may be used in extra time. No use in betting publications, games or single club/league/player publications. (Photo by Oli SCARFF / AFP) / RESTRICTED TO EDITORIAL USE. No use with unauthorized audio, video, data, fixture lists, club/league logos or 'live' services. Online in-match use limited to 120 images. An additional 40 images may be used in extra time. No video emulation. Social media in-match use limited to 120 images. An additional 40 images may be used in extra time. No use in betting publications, games or single club/league/player publications. / RESTRICTED TO EDITORIAL USE. No use with unauthorized audio, video, data, fixture lists, club/league logos or 'live' services. Online in-match use limited to 120 images. An additional 40 images may be used in extra time. No video emulation. Social media in-match use limited to 120 images. An additional 40 images may be used in extra time. No use in betting publications, games or single club/league/player publications. (Photo by OLI SCARFF/AFP via Getty Images)
Costelloe can operate as a winger or a striker, and said: "I'm buzzing, I can't wait to get started and see what the season holds.
"Last season went well for me so I want to kick on, see what this season has to offer and hopefully make a name for myself.
"There's exciting times ahead here, it's a club with ambition so I'm pleased to sign a new contract. I just can't wait to get started again."
