The 25-year-old, who joined the Trotters from Wolverhampton Wanderers in 2009, has agreed to stay at the Reebok Stadium until 2017.
"I wanted to get it done," Bolton boss Dougie Freedman told BBC Sport. "I came into the club [in October] and they were talking to him. It was dragging on a little bit and I wanted to put an end to it.
"I want him to be at the club and I think the fans do. I want to build the team around him, so I just tied up the loose ends."
Davies has played 130 times for Bolton and scored 13 goals since joining from Wolves.
Premier League side Swansea City had a £4m bid for the player turned down at the beginning of the season.