Davies told the Union he wanted to move back to Stradey and WRU chief Roger Lewis said that he would not stand in Davies' way.
Davies was assistant Wales coach to Gareth Jenkins from 2006 to 2007, having also been his number two when Jenkins was in charge at Stradey Park.
He stayed at the Union in his new role following the dismantling of Jenkins's region after the disastrous 2007 World Cup campaign, but was believed to be keen to return to a hands-on coaching position.
Having finished their season with a fifth successive defeat at the weekend, the Scarlets were anxious to fill their vacancy quickly.
Davies will be responsible for first team performance and management of the Scarlets' 40 strong squad of players and leading its team of coaching and fitness staff.
Caretaker coach Paul Moriarty is likely to stay on, but backs coach Robert Jones could be on his way to the Cardiff Blues.
Llanelli-born Davies, 43, won 29 caps at centre between 1988 and 1997, captaining his country against France in 1996.
Nigel's experience with the WRU will help him settle quickly into his new role
WRU boss Roger Lewis
After a highly successful playing career at Llanelli, he retired after losing the Swalec Cup final to Swansea in 1999, joining Jenkins' back-room team at Stradey and then with Wales.
When Jenkins was sacked after last year's World Cup, Davies took over as caretaker coach for the defeat to South Africa.
With Warren Gatland taking over as Wales coach, the WRU made Davies head of rugby development in January, unveiling Graeme Maw as Elite Performance Director at the same time.
Lewis named Davies, Maw and Gatland as the key triumvirate to take Wales forward.
"Whilst it is sad to see Nigel leave the Union we are delighted he is moving to a position at the very top of Welsh rugby," said Lewis.
"He has made great strides in a short time as our Head of Rugby Development and his work has already helped us realise the full strategic and operational importance of the role.
"He would have joined the Executive Board of the WRU if he had stayed and the new appointment will start at that level.
"I must thank the Llanelli Scarlets for keeping us fully informed throughout the process so that we could ensure a smooth transition.
I am looking forward immensely to working closely with Warren Gatland
Nigel Davies
"Nigel's experience with the WRU will help him settle quickly into his new role which will help build and develop the close liaison we now enjoy with each of our four regions.
"This is an example of how talent nurtured and developed in Wales is being retained to make a difference to the development and growth of Welsh rugby."
Davies added: "I am looking forward immensely to working closely with the national coach, Warren Gatland, to ensure he is fully aware of the progress being achieved by all the talent we will be developing at the Scarlets.
"My focus now will be on the thrilling challenges ahead and I approach those challenges with eager determination."
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