The 29-year-old Irishman, who made a total of 50 appearances for Palace last season, has committed himself to Selhurst Park until the end of a new contract which sees him through to the end of the 2014/15 campaign.
"I'm delighted," McCarthy told the club's official website. "It was something that myself, the manager and the chairman have been talking about for some time, so it's great to have it sorted.
"I thought we made good progression last year and speaking to the manager I know we're going to push on again this season.
"Everything's positive about the place, I'm very happy here and have a great relationship with everybody at the club."
McCarthy, who joined Palace from Charlton in the summer of 2008, started out at Manchester City and moved on to Leicester for £100,000 in 2005 before the Addicks paid £650,000 for him.