Jaaskelainen moved to Upton Park last summer on a free transfer to be reunited with Allardyce after spending 15 years at Bolton Wanderers.
The 37-year-old has been an ever-present for the Hammers in the Premier League and has made 33 appearances for the club in all competitions.
The former Finland international will now look to retain his place as West Ham's No 1 next season after earning a 12-month extension.
"It's sorted," Allardyce is quoted in The Times. "The option is linked into this year and kicked in with him completing the games.
"There is no doubt about the value of his signing."