The 32-year-old took to his official Twitter account to reveal the news that he has finally ended speculation over his future by agreeing terms with the club until 2016.
The Spain international's future had been shrouded in doubt in recent months as his previous deal was set to expire at the end of the season.
However, the former Liverpool man has finally committed his future to the Santiago Bernabeu outfit, penning fresh terms to keep him at the club until the summer of 2016.
The Spain international took to his official Twitter account to reveal the news, adding that he was "very happy" to have extended his stay.
Esta seguirá siendo mi casa por dos años más. Un placer comunicároslo. Muy muy feliz ¡¡Hala Madrid!! pic.twitter.com/hURnYccz3W— Xabi Alonso (@XabiAlonso) January 8, 2014
Alonso, who joined the club in 2009, made it clear earlier this month that he was eager to win more trophies with Madrid - including the elusive 10th European title.
The 32-year-old has played 12 times in all competitions to date this season, but is currently sidelined with an inner ear problem and was forced to sit out the win over Celta Vigo on Monday.