ANSA says he has put pen to paper on a contract tying him to Inter until June 30, 2013.
The 32-year-old is set to earn 3.5m per season plus 0.5m in performance-related bonuses, which is a wage cut of 0.5m from his pay-packet in Madrid.
Forlan attended a meeting at the club headquarters this afternoon with his agent, Inter Vice-President Rinaldo Ghelfi, technical director Marco Branca and director of sport Piero Ausilio.
"Inter are a great squad full of excellent players," the Uruguayan hitman told the Gazzetta dello Sport.
"We have a good chance of doing well in every competition. I may be 32, but I feel in great shape.
"Besides, in my family we all seem young for our age."