Mr Davies resigned as chairman of the Assembly's economic development committee after allegations that he had sought sex with gay men in a public place.
The 52-year-old Labour MP succumbed to intense pressure from senior Labour Party figures to stand down to save any further embarrassment to the newly devolved government in Cardiff. His decision followed a heated argument with Alun Michael, the Welsh Secretary, at a meeting of the committee on the eve of today's formal handover of powers to the Assembly.
The resignation was seen by many in the Labour Party as in effect ruling out any chance of a political comeback for the man who was the architect of Welsh devolution.
Mr Davies' announcement represents the second time in eight months that he has been forced to stand down from a top political post over claims about his private life.
He resigned as Welsh Secretary last November after admitting a "moment of madness" on Clapham Common in south London. The Caerphilly MP vigorously denied claims that he had been involved in a sexual encounter and, in May, succeeded in winning a seat on the Assembly.
Mr Michael refused to award him a job in his Cabinet, but the post of chairman of the powerful economic development committee was widely seen as sufficient recompense.
However, the patience of Labour AMs and senior officials finally snapped when a tabloid newspaper claimed that it had caught Mr Davies importuning for gay sex in a beauty spot near his home in Wales.
His colleagues were also upset at a newspaper interview in which Mr Davies admitted he was bisexual and receiving psychiatric treatment for his "compulsive" need for risk- taking. His position became untenable after the chairman of the Wales Labour Party called on him to stand down last week.
In a statement issued yesterday, Mr Davies said: "After reflecting on the views of some of my colleagues that my continued role as chairman of the economic development committee will have an adverse impact on the work of the committee, I have decided to resign from the chairmanship.
"I deeply regret the embarrassment that the events of the last few weeks have caused. The last thing I want to do is to hinder the work of the committee or be the cause of further conflict in the Labour group.
"I intend to remain an active member of the committee and I will continue to service my constituents vigorously as an Assembly member and as a member of Parliament."
The committee is expected to meet again on July 7, when Mr Davies is due to step down formally as chairman.
A senior Labour source in Cardiff said that the party was "relieved" that Mr Davies had finally agreed to step down. "He was just becoming an embarrassment to the party and to the Assembly.
"You can't have a man who admits he has a problem with risk-taking, monitoring an economic budget of millions of pounds."Reuse content