Featherstone, who rose through the ranks at npower Championship side Hull, arrived on free transfer from Hereford last summer following the Bulls' relegation from the Football League, signing a 12-month deal at the Banks's Stadium.
Featherstone has proved his worth to the promotion-chasing Saddlers this term, making a total of 31 appearances, 27 of which have been starts.
And with the 24-year-old's contract due to expire at the end of this season boss Dean Smith has moved to secure his services on an improved deal for the 2013/14 campaign.
Featherstone said: "I am delighted that everything is sorted. It's important that we keep the nucleus of this team together and I am excited by what the future holds in store.
"I thoroughly enjoy working with the gaffer; he is very consistent in what he does and I am able to be myself under him. My game has certainly developed under his influence and now I want to play my part in a positive end to the season."
Smith added: "Nicky has performed really well for us this season. He has showed what ability he has and I am delighted that he has agreed to sign this new deal.
"He has a great attitude; he wants to get better and has a real hunger for the game. I am pleased with the progress he is making here and this is another piece of the jigsaw in place."