Davies made 35 starts and scored two goals in his first season with Albion, which ended with the club being relegated to the Championship. In July 2006 he pledged his future to the club by signing a new four-year deal, and was appointed captain on a permanent basis, having captained the team on several occasions during the previous season to become the club's second youngest captain of all time. He was sent off for the first time in February 2007 after receiving two yellow cards for challenges on Middlesbrough striker Mark Viduka. A month later, he broke a metatarsal in Albion's match against Crystal Palace, an injury that ruled him out for the rest of the season and made him unavailable for selection for the first match at the new Wembley Stadium, an England under-21 international, for which he had been named in the squad. Nevertheless, he was named in the PFA Championship Team of the Year for 2006–07.
Davies made his England under-21 debut on 28 February 2006, against Norway U21s. He was capped three times by the England under-21s from 2006 to 2007. He was named in Fabio Capello's first provisional England squad in January 2008. Davies initially expressed shock at the news of his call-up. He was also named in England's squad to face Germany in November of that year, but did not take the field.