The Argentina international was approaching the end of his previous deal but has now committed until the end of the 2015-16 season.
Demichelis, 34, has become an important member of City's defensive unit after an initially shaky start following his move to the Etihad Stadium in September 2013.
Demichelis told the club's website, www.mcfc.co.uk: "I want to say that I am really proud and happy to have extended my contract for another year.
"Manchester City is a club with a lot of ambition
We want to grow every year.
"When you get to hold a trophy, it's the best feeling for any player.
"I want to say that I will fight for this club and for my team-mates until the end of my contract
I will fight to try and win titles."
Demichelis worked with City manager Manuel Pellegrini at River Plate and Malaga and followed the Chilean to Manchester from the Spanish club via a brief, appearance less, stint at Atletico Madrid.
He also had a successful nine-year spell at Bayern Munich earlier in his career and was a member of the Argentina side that reached last year's World Cup final.
His early appearances for City were not impressive but he improved considerably after the nadir of a red card in a Champions League loss to Barcelona in February last year.
He played a key role in the season run-in that culminated with title success and he has made 30 appearances this season.
Demichelis says he is now settled in England and has not even ruled out looking to stay beyond his new deal.
He said: "We are happy here - my wife and son are happy here
We are trying to improve our English and I think that's a good thing for our future.
"At this stage I am enjoying playing week to week - you can never say what can happen in the future."
Demichelis follows Joe Hart, Vincent Kompany, David Silva, Sergio Aguero, Samir Nasri and Aleksandar Kolarov in committing to the club over the last year.
Discussions with another player out of contract at the end of the season, James Milner, remain ongoing
The England international has been linked with a move abroad in recent days but Pellegrini has often said they are hopeful new terms can be agreed.
Source : PA
Source: PA