The 21-year-old has not featured for Bayern since 17 December after testing positive for COVID-19 earlier this month.
Davies had been due to return to action for the German champion this week, but routine medical checks discovered another medical issue.
Bayern boss Julian Nagelsmann confirmed at a news conference previewing Sunday's (AEDT) trip to Cologne that the Canada international will be out of action indefinitely.
"When we did our follow-up examination we do with every player that has had COVID-19, we detected signs of mild myocarditis, an inflammation of the heart muscle," he said.
"He'll sit out training until further notice. He won't be available, also in the coming weeks.
"The ultrasound shows this myocarditis isn't so dramatic, but it's a sign of myocarditis. Still, it has to heal and that will definitely take some time."
Davies has started 22 of Bayern's 27 matches this season – only Manuel Neuer (25), Thomas Muller and Robert Lewandowski (both 26) have started more.
He has made 16 appearances in the Bundesliga this term and leads the way in the division for dribbles attempted (97) and completed (61).
Davies's lay-off is also bad news for Canada as it has two crucial FIFA World Cup qualifiers at the end of this month.
While the left-back will sit out Bayern's clash with Cologne, Bayern will welcome back six others from last week's shock 2-1 home loss to Borussia Monchengladbach.
But Nagelsmann will not take any risks when it comes to the fitness of Manuel Neuer, Dayot Upamecano, Omar Richards, Leroy Sane, Corentin Tolisso and Tanguy Nianzou.
"None of them are 100 per cent fit," he said. "Some of them had coronavirus symptoms. They're back in the squad, but none except Manu are ready to start or play for long.
Asked about Tolisso's availability, Nagelsmann said: "He had no symptoms and has come back the fittest. We have to see, but he'll be involved."
Leon Goretzka, Kingsley Coman and Lucas Hernandez will miss out this weekend, while Eric Maxim Choupo-Moting and Bouna Sarr are on Africa Cup of Nations duties.
Bayern has won each of its past eight Bundesliga games against Cologne and is unbeaten against the Billy Goats in its past 15 league games (W14 D1).
Steffen Baumgart's sixth-placed side has won its past three league games, however, which is as many as it managed in the previous 14 combined, lifting it to sixth on the table.
The pressure is also back on Bayern after Borussia Dortmund thrashed fourth-placed Freiburg 5-1 in the first clash of the round on Saturday (AEDT).