The 19-year-old winger joined the club from Birmingham City last summer and made nine first-team appearances during the 2025/26 campaign.
"He's an exciting player with a bright future and we're delighted to have been entrusted with the next stage of his development," said Blades manager Chris Wilder.
"We've tracked him for a while, and he arrives with the added endorsement from the likes of Keith Andrews and Jack Lester who are two individuals we know and respect from their time working here.
"They obviously rate him highly because they've utilised him in the Premier League last season, so that's testament to his ability and potential.
"This is a great opportunity and having spoken with the lad I know he's keen to take it with both hands."
An England youth international at U18, U19 and U20 level, Donovan arrives at Bramall Lane with a growing reputation as one of the country's promising young talents.
He has linked up with Chris Wilder's squad ahead of the new Championship season and could make his debut against Mansfield in the EFL Cup next month.