The news means that the Spain international, whose contract was due to expire at the end of the current season, will now remain with the club until the end of June 2016, reports Xinhua.
It also ends one of the long running sagas of the season as Real Madrid worked to maintain the services of the 32-year-old, who is considered vital to their midfield balance.
The news means there is now no chance of Alonso, who joined Madrid in the summer of 2009, returning to the Premier League, at least for the near future.
Earlier in the day, coach Carlo Ancelotti had spoken of Alonso’s importance, saying he was, “one of the strongest midfielders in the World”.
“He is very important for us and when he is available (Alonso is suffering from a perforated eardrum), he will play again,” added the coach.