The former Spain international believes the midfielder remains an integral part of Madrid's team, while he feels Cristiano Ronaldo deserves to win the Ballon d'Or
The 32-year-old's current deal with Madrid is due to expire at the end of the season and a number of sides are closely monitoring Alonso's situation in the Spanish capital.
Hierro feels Alonso still has a lot to offer, though, and has told Madrid to wrap up talks sooner rather than later in order to keep the Spain international on board.
"Without doubt Alonso should sign a new deal at Madrid," Hierro was quoted as saying by AS.
"He’s a vital player for Real Madrid, because of the role he plays, his experience, his importance, his personality and how he understands the game."
Hierro then went on to discuss the 2013 Fifa Ballon d'Or and stressed that Cristiano Ronaldo deserves to win the award this time around.
"Hopefully Cristiano gets it soon. I’ve said many times that I think he should win it, because of everything: the year he’s had, his goals, his importance.
"If I had to vote, I would definitely vote for Cristiano."
The winner of the Ballon d'Or will be announced in Zurich on January 13.