Mr Davies, who was forced to resign from the Cabinet last year, spoke out after The News of the World claimed its reporters had watched him cruise for sex in a gay pick-up place.
Mr Davies denied that he had propositioned men in the beauty spot near his home in Mid Glamorgan, claiming he had been bird-watching. But in a statement issued by his office, he said that he had "for some time, been bisexual".
The statement confirmed what had been widely suspected since last year's "moment of madness" on Clapham Common which cost Mr Davies his job as Welsh Secretary.
His announcement, which makes him Britain's first openly bisexual MP, is unlikely to affect his future in Parliament or the Welsh Assembly.
However party sources said yesterday the statement vindicated Alun Michael's decision not to appoint Mr Davies to his Welsh cabinet last month. Mr Davies is due on Wednesday to begin his role as chairman of the Welsh Assembly's economic development committee.
Last night Mr Davies, 52, who is married, denied the allegations that he had been looking for sex in woodland near his home in Caerphilly.
"I am deeply committed to working for my constituents and for the future development of Wales," he said. "I am not going to be deflected by the malicious antics of the tabloid press."
The News of the World claimed yesterday that Mr Davies had exposed himself to its undercover reporters and had even propositioned them.
In a statement issued by his office, Mr Davies said this was not true. "Having discussed the matter with my wife, however, and in order to put a stop to the intolerable stream of lurid and inaccurate stories, I am left with no alternative but to confirm that I am, and have been for some time, bisexual," he said.
It continued: "Since my resignation I have found myself the subject of a number of untrue stories, sold by individuals purely for gain. During the last week while walking and bird-watching near my home I was approached by individuals who, on two separate occasions, attempted to engage me in conversation of a sexual nature. I ended the conversations and walked away."
He ended: "I am saddened that I have been forced into making this statement and I hope that it will end the continued intrusion into my private life."
In his Commons statement following his resignation, Mr Davies gave a clear hint about his sexuality: "We are what we are. We are all different, the products both of our genes and our experiences," he said.
Mr Michael yesterday declined to comment but party sources in Wales said fear of revelations about Mr Davies had not been a factor in deciding not to offer him a cabinet position.
Police in Wales said they were not investigating any complaints against Mr Davies.
One Wales Labour party source said yesterday that MPs and officials were upset that Mr Davies had apparently misled the vetting panel for the Welsh Assembly.
When asked if he had any "skeletons in the cupboard" that would later embarrass the party, the MP replied he had none. "This is a pattern of Clintonesque, compulsive behaviour. It has ensured he won't ever get in the Welsh cabinet," the source said.