The Irishman is tied to the Eagles until the end of the 2015-16 campaign, and the 31-year-old admits that clarifying his future is a weight off his mind after struggling for fitness in recent seasons.
"I'm delighted, it gives me a bit of security and allows me to remain settled at the club," he told Palace's official website.
"I've worked my socks off over the past couple of years to get back fit and I'm really pleased to be out on the pitch in amongst the action."
McCarthy played a prominent role in helping the club reach the Premier League under Ian Holloway in 2013.
However, the veteran defender has made just one top-flight appearance since due to a troublesome groin injury.