Daniels has yet to make his senior Baggies debut but has been on the bench in the Barclays Premier League this season as understudy to Ben Foster and Boaz Myhill.
Albion's Sporting and Technical Director Richard Garlick said: "He has shown great loyalty to the club since he joined our Academy as a youngster and has developed into a very promising goalkeeper.
"He is an important part of what has become a strong goalkeeping department at the club and he continues to progress well under the guidance of Dean Kiely."
Daniels' signing is a further boost for the Baggies after Myhill agreed a two-year deal with an option for a further year's extension earlier this month.
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