Alonso agrees new two-year deal with Madrid
Real Madrid's midfielder Xabi Alonso gestures during the Spanish league football match Valencia vs Real Madrid at the Mestalla stadium in Valencia on December 22, 2013
"This will continue to be my home for two more years. I am very happy to tell you. Come on Madrid!" he posted on his official Twitter account.
The 32-year-old had been free to talk to other clubs since January 1 as his previous deal was set to come to an end in June.
However, despite interest from a number of leading European clubs, including Manchester City, Chelsea and Paris Saint-Germain, Madrid have managed to tie down the Spain international.
Spanish media reported that the former Liverpool man will earn six million euros ($8.2 million, £5 million) net a season, a two million euro increase on his previous deal.
Alonso's start to the current campaign had been disrupted by a groin injury and breaking a bone in his foot in August.
However, since his return at the end of October, his importance to Carlo Ancelotti's side has been immense as Real have embarked on a 13-game unbeaten run.
After starting his career at Basque side Real Sociedad, Alonso was signed by compatriot Rafael Benitez for Liverpool in 2004 for £10.5 million.
He became a fans' favourite during his five years in Merseyside and famously scored the equaliser as Liverpool came from 3-0 down at half-time to beat AC Milan on penalties in the 2005 Champions League final.
In 2009 he joined Madrid in a £30 million move as part of Real president Florentino Perez's promised spending spree upon being elected for a second term in charge.
He played 36 league games as Madrid won La Liga with a club record 100 points under Jose Mourinho in 2011/12.
And Alonso has also played a key role in the Spanish national team's era of dominance as he played in every game when they won the World Cup for the first time in 2010 and a second consecutive European Championship in 2012.