The announcement came shortly after a meeting of the Labour Party's National Executive Committee turned down his request to hold a dual mandate covering Westminster and the Welsh Assembly.
Mr Davies' political career began to unravel 11 months ago when he resigned as Secretary of State for Wales after admitting a nocturnal "moment of madness" with a stranger on Clapham Common in London.
He also resigned as leader of the Labour Party in the Welsh Assembly and when Labour formed a devolved administration in Cardiff he was not offered a cabinet post. He was appointed chairman of the economic development committee, a post he later vacated after further allegations about his private life.
Mr Davies said last night: "In early summer I announced that I intended to consult members of my constituency party as to whether I should seek to serve the people of Caerphilly as an Assembly member or as an MP. The overwhelming view of my friends, colleagues and the Labour Party at large is that I should remain a member of the National Assembly."
Mr Davies, 53, is credited with being the driving force behind the devolution campaign in Wales. At 23 he was elected to Rhymney Valley District Council as one of the youngest councillors in Wales. Hardworking and committed, he became MP for Caerphilly in 1983 when his majority was 11,553. He held a number of front-bench posts while Labour was in opposition and became Welsh spokesman in 1992.
Mr Davies opposes hunting and was once given police protection after pro-hunters attempted to run him off the road. He and his wife Christina plan to divorce.