The Australia international`s deal was set to expire in the summer, but he will now remain at Madejski Stadium until the summer of 2013.
Royals manager Brian McDermott said: "I'm delighted with the news, he is a top young goalkeeper and a top guy to have around the place as well. He has a real desire to play, he's doing that every single week and it is a real bonus for us that he has decided to commit himself to the club.
"He wanted to be here at Reading, and I know I keep referring to it but we are lucky to have a unique situation here, we have players who want to play for this club and for our fans."
Federici, 25, said: "I'm very happy here and this is great news. It's good to put this all to bed and I`m very happy at Reading. It's a club that has been very good to me and I don't think it would have been fair if I'd walked out on a free.
"Everyone at the club, the manager, staff and supporters have been great. I enjoy working with them every day and that is one of the major reasons why I decided to sign again."