The Irish defender moved to Selhurst Park from Charlton Athletic in 2008, and was almost an ever-present during the 2010-11 and 2011-12 campaigns.
Since Palace won promotion to the Premier League under Ian Holloway in 2013, McCarthy has made just one top-flight appearance, but the club confirmed on Friday that they had agreed terms with the 31-year-old.
McCarthy is now working under Neil Warnock for a second time, after the latter was the man to bring McCarthy to Palace six years ago.
"He's the same old gaffer that left last time," he said.
"Obviously since the last time he was here he's had the added experience in the Premier League at QPR but I don't think he's changed.
"The way he's been throughout his career has obviously worked and I don't think he'll ever be any different, he's the same old manager that left here a few years ago but he's back and straight into business."
