The 22-year-old midfielder will now stay at Selhurst Park until March 17.
Butterfield recently admitted he would be happy to stay on in south London if it means playing first-team football.
"I'd like to think Norwich want me back in the picture, that's up to them," he said. "But I'm happy to be here, I'm happy playing football and I've enjoyed it so far.
"The team is at the right end of the league and it's an exciting time down here, so if I can be a part of that for longer then that would be great."
Butterfield has made five appearances for the Championship promotion chasers since initially joining in mid-January.
He will be in the squad once again for Tuesday night's visit of Bristol City.