Pearce's contract expired this summer and he had been linked with a move to Liverpool, but the Republic of Ireland international has insisted that he always wanted to remain at the Championship club.
The 24-year-old told Sky Sports News: "Everyone knows Reading is close to my heart - I have come through the ranks since I was 12.
"To be playing for this club is a great feeling and it feels great putting pen to paper. It has taken a little while, but I always said that I wanted to stay at Reading and I'm so thankful that I can be a Reading player.
"I've said that I wanted to feel valued, and that's the case now. It's great to be part of something that we can build on this year. I can't wait to get my teeth stuck into this promotion campaign, we've done it once before and we'll be looking to do it once again."
Pearce has made 145 appearances for the Royals.