Davies, who joined Bolton from Wolves in January 2009, has emerged as a key player under manager Owen Coyle this season, making 25 appearances and scoring once.
And the 22-year-old is delighted to have been rewarded with a new four-and-a-half-year deal.
He said: "I'm really pleased to have signed a new contract.
"The football club has been good to me since I moved here two years ago and I'm really settled in the area. The manager believes in me and I feel like I'm part of his plans."