A demodulation algorithm is vital for a fiber Bragg grating (FBG) sensing system. In this paper, a novel demodulation algorithm based on the variable-step-size method and cross-correlation algorithm is proposed to demodulate the wavelength of an FBG. By changing the step size of each calculation, the amount of calculation can be greatly reduced, and pm-level resolution can be achieved over the whole bandwidth. A simulation shows that the demodulation results are not affected by noise, and the algorithm can accurately demodulate the FBG wavelength in a large range. The stability of the algorithm is also tested using three FBG sensors, and the results show that the difference among 25 measurements is only 4 pm. Moreover, the results of temperature calibration experiments show that the sensitivity of the sensor is 41.9 pm/℃, which is similar to the value of 45 pm/℃ provided by the manufacturer. The R2 value of the fitting curve is 0.9994, which means that the demodulation algorithm can be effectively used in sensing measurement.