Financial terms were not disclosed, but Davis reportedly received a five-year contract worth $15.5 million.
"I think this is a great opportunity for me to return home and experience playing in front of friends, family and the fans of the Carolinas," said the 29-year-old Davis, who was released by the Washington Redskins last month for salary cap purposes. "I had a great career in Washington and I'm looking forward to being the best player I can in the seasons to come."
Davis' physical up-the-middle running style was not a fit in Coach Steve Spurrier's wide-open offense, but suits Panthers Coach John Fox.
"Stephen Davis is the type of running back who fits perfectly in our system," Fox said. "He is a big, physical back who can handle a lot of carries. After coaching against him when I was with the New York Giants, I am very excited about having him on my side here with the Carolina Panthers."
From 1999-2001, Davis averaged 326 carries for 1,385 yards and 11 touchdowns. But he had just 820 yards on 207 carries last season under Spurrier, missing four games with knee and shoulder injuries.
The Panthers targeted Davis after releasing veteran back Lamar Smith last month. Smith rushed for 737 yards and seven touchdowns last season for Carolina, but was granted a leave of absence following his drunk driving arrest in November.
The 6-0, 230-pound Davis is third on the Redskins' all-time rushing list with 5,790 yards and 45 touchdowns.