The Liga leaders have endured injury frustrations this term with the likes of Luka Modric, James Rodriguez and Sami Khedira all having spent time on the sidelines.
Spain international Isco has subsequently shown his versatility, with head coach Ancelotti employing him in several different areas of Real's midfield.
"If he [Isco] keeps playing like he has been, his place is non-negotiable," Ancelotti said ahead of Sunday's encounter with Villarreal.
"He's played well in every position. I think we should use him more going forward than in defence, although the key to his current run of form has been his defensive attitude."
Ancelotti also praised the performance of forward Gareth Bale in last weekend's 2-0 win over Elche.
The Welshman has bore the brunt of criticism from the Santiago Bernabeu faithful at times this season, but Ancelotti feels Bale is playing an important role for the team.
"He [Bale] has shown a very good attitude, fighting, winning, sacrificing for all of you," he added. "He had a very important performance last week."
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