The new deal is set to keep the Chile star at the Hawthorns until the summer of 2013.
Jara joined the Baggies in a £1.4million deal from Colo Colo a year ago.
Albion coach Roberto Di Matteo said: “Gonzo fully deserves this new contract. He has proved an excellent acquisition and played a big part in our promotion success last season before his unfortunate injury.
“He is a total professional, has a terrific attitude and his versatility is a real asset to the squad.
“Gonzo has all the attributes needed to play in the Premier League and I believe he has a big role to play this season within the framework of the team.”
