The 38-year-old arrived at Sixways in 2015 after ending a 17-year spell at Munster and this season has featured 19 times in the Aviva Premiership.
The former Ireland international has also been appointed captain by new director of rugby Gary Gold and says that he is "excited" to have extended his stay at the club.
"Our recent form has been reasonably encouraging and that provides us with a decent platform for next season," O'Callaghan said in a statement.
"People often talk about what Warriors can become but it really is time we started to deliver consistent success on the field. Nothing else is acceptable. I believe we have the staff and the squad to compete next season, and I am really excited by the challenge."
Gold added: "Donncha is a phenomenon. He must be one of the most professional rugby players in the world and the manner in which he prepares for matches, mentally and physically, is an outstanding example for any young player. We are delighted he has agreed to remain with the club next season."
Worcester currently sit 11th in the Aviva Premiership table.