The Welsh region announced that 20-year-old Davies has agreed a deal that will run until 2017.
The fly-half starred for Wales in last summer's Junior World Championship, helping them reach the final through a string of impressive performances, and he was subsequently honoured by the IRB.
And he was involved in the senior Wales trial match last Friday as further confirmation of his rapid progress.
Davies, who made 20 Ospreys appearances this season, said: " This is my home region and it's somewhere I am really happy to be.
"I've really enjoyed being involved with the senior team and getting some experience this season, and I've got a real challenge ahead of me over the next three years to keep on improving and to establish myself fully within the group."
- Sports & Recreation