Watford manager Aidy Boothroyd said: "From European back-packer to international footballer, Jay's a future captain of both club and country.
"I'm delighted to have secured him for the future because, as I've said before, it's important to keep the crown jewels.
"He knows he's still got a lot of work to do, but that's the great thing about him - he knows that and he's willing to work hard every day."
DeMerit has scored eight goals in his 113 appearances for the club.