Forest announced that the Republic of Ireland international midfielder has agreed an extended contract until the end of the 2015-16 season after thrashing West Ham 5-0 in the FA Cup third round on Sunday, a game in which Reid scored his side's fifth goal.
Reid is in his second spell at the City Ground, having returned following his release by Blackpool in 2011.
At the age of 31, Reid could feasibly end his career at the club he started out at and Forest manager Billy Davies believes the new deal is richly deserved.
"This is excellent news for the player, club and fans," Davies told the club's official website.
"We're delighted Reidy is going to be here for the next two-and-a-half years."
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