To realize the detection of vibration signals in engineering systems, a fiber Bragg grating (FBG) vibration demodulation system based on diffraction grating is proposed. The demodulation system acquires the sensor reflection spectrum through the dispersion imaging principle, and the signal processing is carried out by the designed embedded unit, while the data processing and analysis are completed by the special upper computer demodulation software. The system is packaged as a demodulation instrument, which can be practically applied to the detection of vibration signal. The designed sensing system has a wavelength demodulation range from 1525 to 1570 nm, a wavelength repeatability of ±1 pm, a resolution of 0.5 pm, 8-channel multiplexing with a maximum spectral demodulation speed of 10 kHz. The experimental results show that the proposed FBG vibration sensing system can be used for high-accuracy measurements of vibration signals of different frequencies and amplitudes with a minimum detectable strain of about 0.319 /Hz1/2, which has potential applications in the field of structural health monitoring.