The club captain will now have to find a new club after the Trotters announced that his current deal, which expires at the end of the season, will not be extended
Davies has played over 400 games for the club, scoring 85 goals, but will now be free to find a new club for next season when his current deal expires in the summer.
Manager Dougie Freedman praised the 36-year-old's professional attitude and commitment, and said the once capped England international will continue to play a role at Bolton for the rest of the season.
“Kevin Davies is and always will be a Wanderers legend," he told the club's official website.
“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.”
Davies has featured 34 times this season for the Trotters, but has scored just six times and will now have to seek out a new club if he wishes to continue his playing career.