Woo-Soon Ko and first-round co-leader Marisa Baena shared third place with 9-under-par 208s.
Sorenstam grabbed a four-shot edge after a bogey by Davies at the 12th but the lead would not remain so high. Sorenstam bogeyed the 15th hole to drop the margin to three and after Davies birdied the 16th, Sorenstam only had a two-stroke advantage.
Both players birdied No. 17 to keep the spread at two shots but Sorenstam birdied the par-5 18th to secure the win.
The victory was Sorenstam's eighth in her brilliant 2001 campaign and the 31st in her LPGA Tour career. She has her sights set on another goal, the $2 million plateau. With this win, Sorenstam earned $106,000 and is now less than $10,000 away from becoming the first player in LPGA Tour history to surpass that figure and can be written into the record books at the Tyco/ADT Championship in two weeks.
Aki Takamura finished alone in fifth at 7-under, followed by Ji Hee Lee, who carded a 4-under 68 on Sunday to come in at minus-six.
Sorenstam began the round with a two-shot lead over Davies but the margin was cut in half after a Davies birdie at No. 2. The Swede rebounded with a birdie at the fourth to get back her two-shot advantage but Davies answered at the next with a birdie to trail by one at 11-under-par.
Davies bogeyed the sixth to fall back by two once again but Sorenstam posted her first bogey of the tournament at No. 7 to cut the margin back to one. Davies bogeyed Nos. 10 and 12 to give Sorenstam her big cushion before the late-round scare.
Sophie Gustafson lost to Lorie Kane in a playoff last year but made a big move on Sunday in 2001. She fired a 4-under-par 68 and shared seventh place with Silvia Cavalleri, Yu Ping Lin and Kayo Yamada. The group finished at four- under 212.
Kane never recovered from her opening-round 73 but carded a 71 on Sunday to join a group in a tie for 11th at minus-three. Yuri Fudoh, who was tied for third at the start of the final round, struggled to a 5-over 77 and was part of the logjam at 3-under.
This event combined 42 LPGA Tour players and 35 members of the Japan LPGA Tour.
Full-field scores from the Mizuno Classic