The 21-year-old arrived at the Banks's Stadium towards the end of September and has started all seven games since. His new agreement sees him remain with the League One club until December 22.
Saddlers boss Dean Smith said: "Karl has done really well for us. We are pleased with his progress and I am delighted Forest have agreed to extend his stay here.
"He's a young lad who is improving all of the time; he has fitted in extremely well here and is keen to stay and build on the experience he has gained with us already."
Darlow penned a new three-year contract with parent club Forest earlier this month.