The striker, 25, joins The Seasiders for an undisclosed fee from Bristol City after one season, 38 appearances and 13 goals for the Ashton Gate club.
Davies started his career with local side Tranmere Rovers in 2005 before joining Derby County three years later.
He scored twice for the Rams in a victory over Blackpool in March 2012 in a 2-1 success.
Davies can also feature on the left-wing and left Pride Park last summer for £750,000 following 22 goals in 94 appearances.
City head coach Sean O'Driscoll says the club received a "fair fee".
"No one has pushed Steven out the door," he said. "Like all players, they want to be playing at the highest level possible.
"Blackpool came in with an offer that we felt was fair and he's decided it's a move he'd like to make. We wish him well for the future."