The 24-year-old centre-back was out of contract this summer and had been linked with Newcastle and Liverpool, but has chosen to remain with the relegated Royals until 2015.
Pearce said: "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."