I know this has been discussed here before, but with the console wars starting up anew, this is an interesting topic to bring up again.
Honestly, I just don't know if it will happen. I would love to see it done; I too saw the demo, and I wanted to cry. But I just don't think the Squeenix wants to keep sinking their time and money into FF7. I know that sounds funny, considering what they're doing with the whole FF7 Compilation thing (Dirge of Cerebus, Advent Children, ad so on). But those are at least new products. However, if the 360 proves to be more of a threat than Sony thought, they may tap Squeenix and convinve them to go ahead and do the remake, knowing that millions of FF7 fans will buy a PS3 just because the game would be remade. And, you also have to consider (and here's the conspiracy theory part): why would Squeenix go out of their way to make a PS3 demo of FF7 if they weren't already in the process of making it? Seems to me like they'd want to show something completely new, right?
In the end, I don't think we'll know until it gets much closer to the PS3 launch date. But it would be one hell of a kicker to the 360 and Revolution, I think.