O’Connor, who came through the youth ranks at Aston Villa, joined the Saddlers last summer from Derby on a one-year deal.
The Birmingham-born 30-year-old is set to remain at the Banks’s Stadium and has his sights set on a promotion push next season in League One.
“I was pleased with my form in the second half of last season,” O’Connor told the club’s official website.
“Now I want to kick on from there. And I am happy to get things sorted.
“I’m proud of our defensive record last season; on the whole we worked well as a unit, it was just disappointing that we couldn’t challenge for the play-offs.
“With a good start to the season and some momentum, I can see no reason whatsoever why we can’t be up there challenging during the campaign ahead. There are no real stand-out teams and with the quality we have here, we have to aim as high as we can.”