Butler, 29, has been a rock at the heart of the Saddlers' defence since his arrival in November 2010, making over 120 appearances and winning the club's Player of the Year award for the past two seasons running.
His new deal, which includes the option of a further 12 months, provides a real shot in the arm for manager Dean Smith and his promotion-chasing side.
Butler said: "I'm really pleased to have signed this new deal. My career has been revived here and I can't praise the gaffer enough, he's treated me well and is one of the main reasons why I have signed.
"He's a great manager and there are some good times ahead for the club, so I am delighted to be part of it."
Boss Smith added: "This news is a big boost to the club. Andy has been fantastic for me. He is a leader of men and commands the total respect of the players, supporters and myself."