The claim about his links to Tehrik-e-Taliban Pakistan was made to The Express Tribune newspaper by unnamed police officials in Punjab province. This comes a day after US media reported that Davis was working for the CIA as a security contractor.
"The Lahore killings were a blessing in disguise for our security agencies who suspected that Davis was masterminding terrorist activities in Lahore and other parts of Punjab," a senior official of Punjab Police was quoted as saying by the daily.
"His close ties with the Tehrik-e-Taliban Pakistan were revealed during the investigations... Davis was instrumental in recruiting young people from Punjab for the Taliban to fuel the bloody insurgency," the official was quoted as saying.
Call records retrieved from mobile phones found on Davis had allegedly established his links with 33 Pakistanis, including 27 militants from the banned Taliban and Lashkar-e-Jhangvi, sources were quoted as saying by the newspaper.
The report claimed Davis was "said to be working on a plan to give credence to the American notion that Pakistan's nuclear weapons are not safe."
It added: "For this purpose, he was setting up a group of the Taliban which would do his bidding."
Former military ruler Pervez Musharraf had cut a secret deal with the US in 2006 to allow clandestine CIA operations in Pakistan, the daily reported.
However, "the government and security agencies were surprised to know that Davis and some of his colleagues were involved in activities that were not spelt out in the agreement," a source told the newspaper.
Davis' job was to trace the links of the Taliban and al- Qaeda in different parts of Pakistan but instead investigators found that he had developed "close links" with the Taliban, the source claimed.
Investigators recovered 158 items from Davis, including a 9mm Glock pistol, 75 bullets, a GPS device, an infrared torch, a wireless set, two mobile phones, a digital camera, a survival kit, five ATM cards and Pakistani and US currency.
The camera had photographs of Pakistani defence installations.
Intelligence officials claimed these items proved that Davis was involved in "activities detrimental to Pakistan''s national interests."
American newspapers lifted a self-imposed gag on Davis' CIA links yesterday.
The New York Times, citing American government officials, reported that Davis "was part of a covert, CIA-led team of operatives conducting surveillance on militant groups deep inside the country."
Among the groups that Davis was keeping an eye on was the banned Lashker-e-Taiba, which carried out the 2008 Mumbai terror attacks, The New York Times reported.
The US had earlier described Davis as a member of the "technical and administrative staff" of its embassy in Pakistan.
Pakistani leaders, fearful of a public backlash, have turned down repeated US demands for Davis to be freed on grounds of diplomatic immunity and insisted that his case will be decided by the courts according to the country's laws.