The prince, 27, and Davy, 26, ended their stormy five-year romance in 2009; however, the young lawyer was friendly towards Harry when she attended the wedding of his brother to Kate Middleton last year.
"They're not dating again, but they are seeing each other," an insider told the celebrity news Web site about Harry and his former flame. "There's definitely a romantic connection still. They will never be 'just friends' -- both of them admit that's impossible."
The source said the root of the tension between the two is Harry's service in the military, which frequently takes him away from home. He is a helicopter pilot in the Blues and Royals of the Household Cavalry Regiment.
"If Harry can stay in London for a while then he has a good chance of being back on with Chelsy, but she doesn't like it when he has to go away for months on end," the source told UsMagazine.com. "It's easier to be apart than together and pining for someone you can't see."