The actor and director has signed up to reprise his role as Tony Stark's sidekick and bodyguard Happy Hogan, according to The Hollywood Reporter.
Kiss Kiss Bang Bang director Shane Black will take over from Favreau in the director's chair on Iron Man 3. However, Favreau, who directed the trilogy's first two instalments, will serve as co-executive producer with Kevin Feige.
Iron Man 3 will see Robert Downey Jr return as Iron Man/Tony Stark, with Gwyneth Paltrow and Don Cheadle also returning to the series. Scarlett Johansson is rumoured to reprise her role as Natasha Romanov/Black Widow.
Guy Pearce is to play Aldrich Killian, while Sir Ben Kingsley is also likely to appear as a villain.
James Badge Dale and Rebecca Hall will also appear.
Production got underway on Iron Man 3 this Wednesday (May 23) in North Carolina.
Watch a clip from Iron Man 2 below: