Wednesday had appeared to be on the verge of completing a deal for Davies last week, when they agreed a £750,000 fee for the central midfielder.
Davies held discussions with Hillsborough representatives, but personal terms between the two parties could not be agreed.
As a result the move has collapsed, and Fulham are now reportedly set to swoop, as they look to take advantage of the Owls' failure to wrap up a deal.
Davies has established himself as one of the most talented midfielders in the Championship, and Slavisa Jokanovic apparently believes that he would increase his options at Craven Cottage.
Bolton are not in a position to stand in the way of the 27-year-old, should a move be possible.
The Trotters have to raise funds in the January transfer window, and Davies could be one of a number of players to leave the Macron Stadium over the coming weeks.