The 23-year-old academy graduate is in his ninth year with the Royals and has made 136 appearances to date.
Karacan made 37 of them last season as Reading won the npower Championship and has now extended his stay at the Madejski Stadium.
"I'm delighted to get it done," Karacan told the club's official website. "We've been in negotiations for a while so it's nice to finally put pen to paper.
"To come through with the likes of Pearcey (Alex Pearce), Churchy (Simon Church), Alex McCarthy, Gylfi [Sigurdsson], was brilliant - and each and every one of us has done well.
"I have to thank the gaffer, especially as he's just offered me a new deal. He's been great and has given the youngsters a chance to prove themselves - you don't see too many clubs doing that."
Karacan has become a key player for the Berkshire side in recent years and finished second in the voting for the club's 2011/12 player of the season.
"We are delighted that Jem has committed to us," Reading manager Brian McDermott said.
"He's been an integral part of what we've been trying to do. He's a great lad who is very much one of our own and we're really pleased that he has signed a new deal."
Source: PA
Source: PA