The former Leeds and Scarlets coach agreed an extension that will keep him at Sixways until the end of the 2013/14 season.
Davies left his post as the Wales Under-20s coach to join the Warriors in July 2010, enjoying instant success as the club were promoted to the Aviva Premiership at the first time of asking.
"There was one aim last year and that was to get back to the Aviva Premiership. That was our big goal," said Davies.
"Now we have an opportunity to build on that and enjoy a strong future. Our first year back is going to be tough and challenging for everybody, but it is something we are all looking forward to. It's an exciting time."
Worcester begin the 2011/12 Premiership season with a home fixture against Sale Sharks on Saturday, September 3.