The 27-year-old striker had been without a club since the end of last season when he left Blackpool.
However, he has now returned to the game on a one-year contract at the Coral Windows Stadium.
"Steve is a very technical player with a great left foot. He has quality in his all-round game," manager Phil Parkinson told the club's official website.
"He has played most of his career at Championship level and is still only 27-years-old. There is still a lot of football years ahead for him. We have got ourselves a very talented player."
Prior to Blackpool, Davies played for Tranmere Rovers, Derby County, Bristol City and Sheffield United.