It extends his stay at Deepdale until June 2020 and shows he is now firmly established back in the North End squad after four loan spells away from the club in recent seasons.
Davies, who came through PNE's academy, was in the final year of his contract until agreeing the new deal.
He made his Preston debut as a 17-year-old in February 2013 but more than 100 of his first-team appearances came during loans with York City, Tranmere Rovers, Southport, Newport County and Fleetwood Town.
After an impressive run of games at Fleetwood in the second-half of last season, Davies returned to Deepdale for pre-season and has caught the eye of Alex Neil.
Davies has featured in six of PNE's seven friendlies, with him coming on as a substitute in Friday night's 5-1 win over Fleetwood at Highbury Stadium.
Fleetwood had been keen to sign him on a permanent basis during the summer but now he will push for a regular place in the North End side.
Davies said: "I came back in pre-season not really knowing what to expect, but obviously trying to make my stamp on the team and with the new manager coming in and showing faith in me, it is a great boost so I'm delighted.
"It's about playing football and I want to try and nail down some games this year and with the security of three years, I can do that and focus on playing well for Preston.”
He is the second PNE player to sign a new contract this week, midfielder Alan Browne having done so on Thursday - also until the summer of 2020.
Last month, Tom Barkhuizen penned a contract extension.