Alonso, who turned 32 last month, missed the start of the current campaign due to injury and Real struggled without his controlling influence in central midfield.
They have looked much more assured since his return at the end of October and Ancelotti said it was "important for everyone" at the club that he remained after his current deal expires.
"We are waiting for Xabi's decision," Ancelotti told a news conference ahead of Real's King's Cup last 32, first leg at third-tier Olimpic de Xativa on Saturday.
"He is very relaxed, we are talking, I have talked to him, the club is talking to him and I think he will decide very soon what he has to do," added the Italian.
"It is not a priority, the priority is to keep the good results and good matches going.
"The priority is to win games and play well up until the Christmas break.
"After that, Xabi Alonso's contract renewal is important for everyone, for the club, for the team."
Real will be seeking their fifth win in a row in all competitions at lowly Olimpic, who play in the regional "Segunda B" division.
The 2011 Cup winners are likely to give some of their youngsters a run-out on Saturday, although Ancelotti said Real's Portugal forward Cristiano Ronaldo was fit again after picking up a minor muscle strain last month.
The Champions League and La Liga top scorer would definitely feature in Real's Group B match at FC Copenhagen on Tuesday, he added. Real have already qualified for the last 16 of Europe's elite club competition as group winners.