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The UK's Daily Mail reports the club will renegotiate further at the end of the season with the lure of a five-year deal.
Reid has played all but 68 minutes of West Ham's current Premier League season, starting in all 21 games and substituted only once.
"There was never any chance of us letting him go," a club insider told the newspaper. "We want to build for the future and Winston has a key role to play going forward."
Reid has made 13 'A' appearances for New Zealand and scored a historic equaliser against Slovakia at the 2010 World Cup.
The 24-year-old signed with West Ham from Danish club side Midtjylland following the World Cup and has made 56 appearances for the east London side.
With Ryan Nelsen leaving the Premier League to take up a coaching post with MLS side Toronto FC, Reid will be the only New Zealander playing in England's top league.
West Ham are 11th on the Premier League table and face leaders Manchester United in an FA Cup third round replay tomorrow, with Reid expected to start after missing the initial fixture two weeks ago.