The 24-year-old has made eight Test appearances for the Wallabies since his debut in June last year.
Dempsey, who first played for the Waratahs in 2015, has endured a tough year ruined by injuries.
“I went a long time without any good news so now to have some back-to-back good news after playing the last game and to now re-sign is just awesome,” he said after recommitting until at least 2020.
“Firstly to stay in New South Wales is great but then to have the opportunity to represent Australia for potentially the next two years is just a cherry on top.
“The support I’ve had from the Waratahs and the Wallabies over the past year has been world class so I have to thank them so much for helping me get back to this level.”
Wallabies coach Michael Cheika praised Dempsey’s bravery and hunger.
“He’s a tough guy, you can see that in him. He’s got a real thirst for it. He wants to play footy, he wants to try and be the best he can be,” he said.
“I’m getting to know him better and better but I can already see he’s hungry to play and that’s the number one prerequisite for good footballers is that they want to play at all costs.”
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