Carr's current deal with Blues was due to expire next summer.
But the 33-year-old has extended his stay via a 12-month option being added to the contract.
Carr was persuaded out of retirement by City boss Alex McLeish 18 months ago.
He has been one of Birmingham's most consistent performers and played a major role in them finishing ninth in the Premier League last season.
City are still waiting to see whether AZ Alkmaar striker Moussa Dembele will make the move to St Andrew's in a £5million deal.
Dembele has held talks with Blues who remain favourites to sign him despite interest from West Ham and West Brom.
Dembele said: "I'll make a decision in the following days. I don't want this to go on to long."
City have also held talks with Juventus midfielder Mauro Camoranesi but he has now returned to Italy.