Wanderers entered discussions with the 27-year-old earlier this week having activated a release clause in his Oakwell contract, understood to be in the region of £300,000.
Davies scored 20 goals in 64 appearances for Barnsley, including four in this season's televised 5-0 triumph over Birmingham, and he has penned a two-and-a-half year deal at the Reebok Stadium.
"Craig is a player I am really fond of," Trotters boss Dougie Freedman told his club's official website. "I actually tried to sign him a couple of years ago and he will bring all the right ingredients to our club.
"He is hungry. He hasn't got the t-shirt of playing in the Premier League, but is desperate to get it.
"He's a good age and represents very good value for the football club. He is the type of player I want around the place."
