The 32-year-old's current deal expires at the end of the season and the lack of an announcement of a new contract had prompted speculation Alonso might accept a lucrative offer from an English Premier League club.
He has agreed a two-year extension with an option for another year and will be paid a net salary of 6 million euros (£4.9 million) a season, Spanish media said.
Real were not immediately available to comment on the reports.
Alonso's poise and passing ability have been crucial to the Madrid club's success in recent years and Carlo Ancelotti's side have looked vulnerable when he has missed games through injury.
He is in his fifth season at Real having joined from Liverpool in 2009.
(Reporting by Iain Rogers, editing by Ed Osmond)
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