A new identification/reduction algorithm for linear, discrete time-invariant (LDTI) systems is proposed which is based on the extended impulse response gramian first defined here for LDTI systems. The reduction algorithm employs singular value decomposition to retain states corresponding to dominant singular values of these gramians. The proven propel-ties of the reduced-order models include convergence to a balanced realization with conditional controllability, observability, and asymptotic stability. A suboptimal property of the model (in minimizing an impulse response error norm) is also demonstrated. The proposed technique can handle impulse response data of deterministic or stochastic nature for System identification application.