In order to address issues such as low demodulation accuracy, large demodulation errors, small dynamic range, and complex algorithms for the extrinsic Fabry–Perot interferometric (EFPI) sensor, a five-step phase-shift algorithm based on a multiwavelength (MW)-averaging method is proposed to improve demodulation speed, noise stability, dynamic range, and noise suppression. The proposed demodulation method utilizes white-light interferometry (WLI) technology to acquire the reflection spectra and extract the five-step phase-shift signals at Ns consecutive operating points. The demodulation results of Ns sets of five-step phase-shift signals are averaged to obtain the average demodulated phase and cavity length variation. Theoretical analysis demonstrates the significant effects of the MW demodulation method on demodulation parameter errors and noise suppression. Particularly, when the demodulation parameter θ = π/2 rad, the method exhibits excellent stability against demodulation parameter error-induced instability. Moreover, it greatly improves noise suppression and reduces noise fluctuations. Numerical simulations are conducted to validate the performance of the proposed demodulation method. Compared with the traditional single-wavelength (SW) five-step phase-shifting demodulation method, the MW demodulation method exhibits stronger noise- and harmonic-suppression capabilities as the number of averaging wavelengths Ns increases. The harmonic distortion of the MW demodulation method with Ns = 128 is 20 dB lower than that of the SW demodulation method, and the noise is 15 dB lower. Furthermore, the proposed method effectively suppresses the influence of demodulation parameter errors on signal demodulation. This proposed demodulation method has the potential for fast real-time dynamic demodulation. It has great significance and application in the field of weak signal detection in fiber-optic sensors with interferometer structures and has enormous advantages in noise-suppression in complex environments.