Davies, 26, yet to make a senior appearance for Liverpool after joining from the Lilywhites in January, is Blades boss Slavisa Jokanovic’s first signing.
The Blades said on their official website: “Liverpool’s Ben Davies arrives at Bramall Lane on a season-long deal, which will see him remain at S2 for the remainder of the 2021/22 campaign and bolster United’s defensive options moving forward.”
Davies said: “Hopefully I can fit into the manager’s plans well.
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“I’ve missed matchdays and the buzz of having fans in grounds.
“That is part of the excitement of coming here and hopefully having a successful year.”
Centre-half Davies was signed for a reported £2m by Liverpool after injuries last season to Virgil van Dijk, Joel Matip and Joe Gomez.
He started out at Preston, making his first-team debut aged 17, and has also had loan spells at York, Tranmere, Southport, Newport and Fleetwood.
The Blades, relegated from the Premier League last season, appointed Jokanovic as their permanent manager in May following the departure of Chris Wilder.
It is understood the Blades will have no option to buy as the Reds look to keep their options open regarding the future of the centre-back.
Celtic, Bournemouth and Burnley have been linked with the defender, who made 145 appearances, becoming a mainstay of Preston’s defence in the Championship.