Davies was released by Bolton in the summer after 10 years at the club, and he turned down a number of offers elsewhere to drop down a division to League One.
Davies, 36, played 407 games for Bolton, scoring 85 goals.
He started his career at Chesterfield, making his name in their famous run to the FA Cup semi-finals in 1997.
He joined Southampton that year but after just one season moved on to Blackburn in a club-record £7.5million deal.
He returned to the south coast, making a further 95 appearances for Southampton before heading back to the north-west with Bolton in 2003.
He has been given the number 9 shirt at Deepdale and could make his first appearance for Preston in the Shankly Shield fixture against Liverpool on Saturday, 13 July.