The invention relates to an unbalanced interferometer based fiber bragg grating (FBG) demodulation system and method, belonging to the technical field of fiber optic sensing. The system sequentially passes through a superluminescent diode (SLD) or an amplified spontaneous emission (ASE) broadband light source, an optic isolator, a circulator or a coupler, and a fiber bragg grating and returns back to the circulator or the coupler, and then passes through the coupler, an unbalanced Michelson interferometer with two channels and a Faraday rotator mirror and returns back to an interferometer and the coupler or passes through a Mach-Zehnder interferometer with two channels and the coupler, wherein one channel of the interferometer is wound around a piezoelectric ceramic or an electrooptical modulator, and an acousto-optic modulator, finally passes through a dense wave division multiplexer and a photoelectric detector and is connected with an ARCTAN based PGC (Phase Generation Carrier) signal response demodulation module. The invention has the advantages; by adopting the combination of the an FBG sensor and ARCTAN-based PGC phase modulation, the system has high sensitivity, large dynamic range and good linearity, good response to an abrupt signal and easiness of multiplexing, low cost and easiness of implementing.