The 31-year-old's previous deal at Upton Park had been due to expire at the end of the current season, which would have made him a free agent.
However, under the terms of his fresh contract, the former Ivory Coast international has committed himself to the Hammers until the summer of 2015.
"It's really good for me and I'm really happy to have a new deal with West Ham," he told the club's official website. "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."
Demel joined West Ham in 2011 from German side Hamburg.