Darren Bent insisted he had to leave Aston Villa after too many "slaps in the face".
Brighton defender Greg Halford has agreed to extend his loan deal from Nottingham Forest until the New Year.
Davis was loaned out to Chesterfield earlier in the season but a series of injuries earned him a recall to Molineux by Wolves boss Terry Connor.
The 21-year-old impressed sufficiently during six Barclays Premier League appearances to earn the new deal, despite the club's relegation being confirmed last weekend.
Davis said on wolves.co.uk: "This new contract really is the icing on the cake for me.
"It's secured my future at my club, Wolves, the club I want to play for. It really is a dream come true.
"I have been learning the trade whilst I've been out on loan and now I'm back here playing in the best league in the world. It's a big achievement for me.
"Obviously, us getting relegated has been a bitter disappointment but I think that we can bounce back and I would like to play my part in that objective."