Is it appropriate to use demise in the following sentence:
it is with deep sympathy that we announce the sad demise of ...
It sounds archaic and I was not sure whether it was used correctly. How is demise usually used?
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It is entirely appropriate to use demise in that sentence. Statements of sympathy and condolence are normally of a rather solemn and formal nature, and the higher register is entirely suitable to the occasion. Demise is also a less direct term than death: the use of euphemism, however minor, softens the bald statement of what may be to some a tragic passing.
Demise can be used to describe the death of a person (perhaps especially in the case of a famous yet not-necessarily-beloved person, or in a tragic and untimely death), or to the crumbling downfall of an institution. I believe the latter usage is more common in modern writing, but I couldn't say that for sure (although the usages listed on the Wordnik page would seem to back me up).
That said, I don't know if I'd go so far as to call your example usage archaic. It's certainly within the scope of the dictionary's definition, and it's not hard to find such usages in a Google book search:
The use of demise is correct in the given context. Just as one might say 'passing away'.
It is not archaic but formal and somewhat euphemistic. In an obituary announcement, demise is used rather than death — so as not to hurt sentiments.
Wikipedia notes that it is a euphemism
1911 Encyclopædia Britannica records:
Note the word often in both the later references.