The striker moved to the Trotters in the summer of 2003 on a free transfer from Southampton.
Davies has racked up over 400 appearances, scoring 84 goals, for Bolton in all competitions but will end his time at the Reebok when his current deal expires in June 2013.
In October 2010, Davies earned international recognition as a 33-year-old, winning his only England cap in the Euro 2012 qualifier against Montenegro at Wembley.
Manager Dougie Freedman said: "Kevin Davies is and always will be a Wanderers legend.
"I want to be fair to him as regards his future, as he deserves it. This decision means that he is now free to sort himself out with a new club in plenty of time for next season.
"Being the type of man Kevin is, we sat down and had a chat about the future. He wants to carry on playing, and playing regularly. He has that desire to continue and this is the best move for him.
"I would like to thank him for his complete support and utter professionalism since I arrived.
"He never gives anything less than 100 percent in training, or when called on for first team duties.
"He will continue to be available for selection for the remaining games of the season."