The new deal will keep the 23-year-old at Reading until the summer of 2015.
"I'm delighted to get it done," Karacan told the club's official website. "We've been in negotiations for a while so it's nice to finally put pen to paper.
"To come through with the likes of Pearcey (Alex Pearce), Churchy (Simon Church), Alex McCarthy, Gylfi [Sigurdsson], was brilliant - and each and every one of us has done well.
"I have to thank the gaffer, especially as he's just offered me a new deal. He's been great and has given the youngsters a chance to prove themselves - you don't see too many clubs doing that.
"Nigel Gibbs has been brilliant as well ever since he joined as a development coach.
"It gave us a chance to work with a top quality coach and use his experience.
"Eamonn [Dolan] has also done a fantastic job and there are a lot of good young lads that are coming through.
"There are so many people to thank but now I can focus on the team and getting up the table."
"We are delighted that Jem has committed to us," Reading manager Brian McDermott said.
"He's been an integral part of what we've been trying to do.
"He's a great lad who is very much one of our own and we're really pleased that he has signed a new deal."