Isco, 24, started and scored Real's second goal in their 3-0 win over Deportivo Alaves at the Santiago Bernabeu on 2 April.
The Spain international has only started 14 La Liga games for Zidane's side this season, leading to speculation that he could leave the club in search of regular first-team football.
The Sun reported in March that City boss Pep Guardiola was interested in signing Isco as a long-term successor to David Silva, while Premier League leaders Chelsea have also been linked with a move for the Spaniard.
"I want him to renew, he is an important player," Zidane was quoted as saying by Marca when questioned about Isco's performance in the Alaves win.
"He wants to stay here, to play here. I am happy with his performance, not only for the goal but for what he did between the lines, what he helped the others do.
"Every three days there is an important game. Everyone can have their opinions but to win La Liga and the Champions League makes every player important.
"When Isco plays, he does well, but we have 24 players and they are all important."
Isco joined Real from Malaga for a €30m (£25m) fee in 2013. He has 15 months left on his contract at the Santiago Bernabeu.
Club captain Sergio Ramos said last week that the Real dressing room wanted Isco to extend his contract.
"We hope Isco stays. It's better to be at Madrid than to go anywhere else," the centre-back was reported as saying by the Daily Mail.
"Isco has to look for balance and happiness. He's taking everything in a calm way, putting everything that's being said to one side, and from there he can be happy and play good football."