The City striker has made a big impact following his move from River Plate in the summer and capped a remarkable year by helping Argentina to a World Cup triumph in December.
Alvarez will be in contention for a starting place for Saturday ‘s FA Cup quarter-final clash with Burnley in our final game before the international break.
“It was not easy for him for the fact, they can play together, but he plays in the position of Erling,” Guardiola said in his pre-match news conference.
“It’s not easy but his behaviour since day one off the pitch when he plays or he doesn’t play [is excellent].
“His contribution when he plays is amazing. All of us believe he is a future player.
“We are delighted he extended the contract.”
Alvarez said he was proud to sign the new deal and has set his sights on finishing the season with more silverware.
And Guardiola said it’s difficult to select his side with players like Alvarez around the first-team squad.
“The players don’t believe me but most of the time I feel more for the guys who don’t play than the guys who play regularly,” he added.
“Always I try to care or pay attention to their feelings, especially if they deserve it and they behave thinking about the team. If they are thinking about ‘me, me, me’ I don’t care.
“Every player who thinks about what is best for the team, the club will always be behind them.”
Meanwhile, Guardiola will assess his squad after the final training session before the sixth-round clash at the Etihad Stadium.
“I didn’t talk to them after Leipzig,” the boss said. “We had a day off.
“We will start to talk about Burnley after the draw because it’s one step from Wembley. Burnley deserve this attention.”
Bernardo Silva is unavailable for selection as he serves a one-match suspension.