The Spain midfielder did not feature until October 30 this season after undergoing two operations in pre-season to address a groin injury and a fractured metatarsal.
But he has underlined his importance to the side since his return and coach Ancelotti wants to see Alonso pen a new deal at the Bernabeu.
"I have spoken with Xabi Alonso just to tell him that everyone wants him to stay, the coach, the other players, the club," the Italian said. "After that he will have to make the best decision for him."
The 32-year-old has been with Real since 2009, having left Liverpool to return to his home country.
Ancelotti's men have not lost since Alonso's return and the coach is happy with the way things are shaping up ahead of Saturday's trip to Osasuna.
"At the moment we are looking solid and there is a good chemistry in the changing room among the players, so I think we will perform differently," he added.
"I won't change the starting line-up much. I think the players have recovered well after Tuesday's match (a 2-0 UEFA Champions League win over Copenhagen).
"We know that tomorrow's (Saturday's) match will definitely be a difficult match, so we have to give the best of ourselves because this game traditionally has been very tough for Real Madrid, but if we play at our best we can win.
"The team's attitude on the pitch is good, we are solid in defence, we are playing with a clear style, it's an excellent moment for Real Madrid.
"Now we must carry on like this, because the season is very long and we must give some continuity to our style of football and the results with the attitude we have adopted."
