The 34-year-old, who was in the final year of his contract, has established himself as a key part of Manuel Pellegrini's defence despite the signing of Eliaquim Mangala last summer.
"I want to say that I am really proud and happy to have extended my contract for another year," he told the club's official website.
"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 has made 20 Premier League appearances for City this season as the club looks to retain the league title they won last term.
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