The 31-year-old Ivory Coast right-back joined on an initial two-year deal from Hamburg in August 2011.
Demel told West Ham's official website: "It's really good for me and I'm really happy to have a new deal with West Ham."
Injuries punctuated Demel's first season at Upton Park, but he has featured 17 times this term and started the last seven fixtures, including last Saturday's draw with QPR.
He added: "I've had a good year this season, and even last year was good, despite the fact that I was injured for so long and struggled a bit.
"I'm happy to be at West Ham and in the team. The lads are really good with me as are the people working for the club. I hope I will stay that long to play in the new stadium as well.
"Last year was kind of difficult because when I signed, I had pre-season, and then unfortunately I got injured really quickly and it was hard to come back afterwards.
"But right now I feel good. I had a pre-season, we worked hard and I have to thank the medical staff for the job they have done with me. I feel good and I'm quite happy with what I'm doing right now, but I know that I can do even more."
- Sports & Recreation