To demodulate wavelength shift of fiber Bragg grating, a new direct-demodulation technique is demonstrated. An unbalanced fiber Mach-Zehnder interferometer comprising a 2×2 coupler and a 3×3 coupler is used as wavelength discriminator for fiber grating, 120° phase difference between the three outputs of interferometer. The wavelength shift of fiber grating can be demodulated directly by calculating three outputs of interferometer. Demodulation is fulfilled by software when signals are sampled and inputted into computer. The minimum detectable dynamic strain of 0.51 nε/Hz1/2 can be achieved when the unbalanced length of the beams is 5 mm. The spectra of the demodulated signal and the relationship between the input and output are also given.