The 30-year-old has been sidelined by a thigh injury since April of last year, and has yet to play under manager Brendan Rodgers as a result.
But Rodgers has extended the Republic of Ireland international's stay, with Butler set to continue his comeback by featuring in Wednesday night's reserve-team fixture against Bolton.
Butler told the club website: "I'm pleased that the manager has shown a lot of faith in me by giving me another year's contract.
"Last season was a nightmare for me with injury as I was out of action for nearly a year. It was even harder because with a new manager coming in you always want to show him what you can do.
"But you can't always control injuries; these things happen in football. But hopefully the injuries are behind me and now that I am fully fit I can make up for lost time."
Club captain Garry Monk is also set to feature for the reserves, the defender is seeking to prove he is over a foot problem ahead of Saturday's clash with Wigan having missed the defeat at Manchester City.
Source: PA
Source: PA