Davies, who would have been out of contract in the summer, has penned a deal which keeps him at Deepdale until June 2019.
The 21-year-old has made 11 starts and one substitute appearance since breaking into the first-team in 2013.
He has played twice in the first-team this season, both in the EFL Cup against Bournemouth and Newcastle United.
Barrow-born Davies came through the youth ranks at North End and has had loan spells with York City, Tranmere, Southport and Newport.
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Davies said: “It’s brilliant to commit to this club again.
“I have been here 10 years now and I’ve enjoyed every minute so far.
“I feel like I’m progressing, especially this year and it’s good to now be able to concentrate purely on football now that I’m settled.”