The 20-year-old left-back has signed a four-and-a-half-year contract with Michael Laudrup's side which extends his stay at the Liberty Stadium until 2017
The 20-year-old became a regular for the Premier League side last season following an injury to Neil Taylor, earning international recognition from Wales as a result.
Davies has gone on to start 15 of Swansea's 17 league games to date this term, and has now agreed a new deal just over 12 months after penning a previous extension.
He told the club's official website: "I'm very happy to have signed the new contract.
"It wasn't a difficult decision and it's always great to sign a new deal and commit my future to the club.
"This is a great place to learn and improve and it's nice to be rewarded for all the effort I've put in.
"I feel as though I'm getting better all the time and this is a good place to play football, especially with the style of play we have at the club.
"I think it's the right place to be at in terms of my career, and if I'm playing regularly and I'm happy then that's the main thing and all I can ask for."