"The style of play that manager Chris Coleman has developed here will suit my game," he told the club's website.
Davies joined Everton from Tottenham for £3.5m in May 2005 and has made 53 appearances, scoring a solitary goal in a spell hindered by injuries.
"I'm really happy to have joined Fulham as Chris is a manager I know and admire very much," added Davies.
"I've wanted to come back to London for a while now so it's a good move for me, and I'm eager to train hard and contribute as much as I can to the rest of the season's campaign."
"Simon will fit in really well here, is a player I have admired for a long time and obviously I know him well because of the Welsh national team," he said. He is a versatile player; he can play centre midfield, wide right and right-back, so we have the option of utilising him in a number of positions."
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I have to admit I am fairly surprised by this move. I thought he was doing well at Everton and moving to Fulham would be a step down for him.
But fair play to Fulham they have got a good player that can help the club push on. Montella and Davies look inspired signings by Coleman already.
Remember when Davies was at Spurs, he was being lined up with a Man Utd move as a replacement for Giggs.